Calendar & Diagonal Spreads
Exploiting term structure and non-linear theta decay in the options market.
Strategy Overview
Calendar spreads involve selling a near-term option and buying a longer-term option at the same strike. This exploits the fact that options decay faster the closer they get to expiration.
Execution Mechanics
By being short near-dated theta and long far-dated vega, traders profit if the underlying stock stays relatively flat while implied volatility holds steady or rises.
⚠️ Risks & Considerations
Significant directional moves in the underlying stock can result in losses, as the spread is essentially a neutral to mildly directional trade.
Regime Applicability
- Best Environment: Low volatility environments where implied volatility is expected to rise, with a neutral price outlook.
- Worst Environment: Earnings seasons or binary events where IV crush affects the long leg, or extreme directional trends.