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Advanced Strategies: Calendars & Diagonals

Calendars and diagonals are time spreads: you sell a near-term option and buy a longer-dated option. The magic comes from differing decay rates, so the short option decays faster while the long option holds value.

Before You Trade

These examples and charts are simplified teaching models. Confirm live pricing, liquidity, and assignment risk in your broker before placing real trades.

Time spreads

Different expirations, different decay

The short option decays quickly, the long option decays slowly. That gives you positive theta while still keeping some directional exposure through the long leg.

Why time spreads are special

Calendars can profit even if the stock barely moves. You want the short option to expire while the long option retains value.

Structure

Calendar = same strike, diagonal = different

A calendar uses the same strike for both legs. A diagonal shifts the long strike to lean directional (bullish or bearish) while still collecting short-term decay.

Estimated P/L at front-month expiration for a calendar vs diagonal.

Illustrative example only: chart values are simplified to teach mechanics and are not live quotes or trade forecasts.

Profit Zone

Peak profit near the short strike

Calendars have a "tent" shape. You profit most if price hovers near the short strike at the front expiration. Diagonals shift the tent toward the long strike, creating a directional bias.

Short option decay accelerates as expiration approaches.

Illustrative example only: chart values are simplified to teach mechanics and are not live quotes or trade forecasts.

Greeks

Theta + vega are the main drivers

Time spreads are typically positive theta and positive vega. That means you gain from time passing and from volatility rising, a rare combination.

Typical Greek mix for a neutral calendar spread.

Illustrative example only: chart values are simplified to teach mechanics and are not live quotes or trade forecasts.

Greek example

If IV rises by 5%, a positive vega calendar can gain even if price is unchanged. Meanwhile each day of decay reduces the short leg faster than the long leg.

Management

Roll the short leg to keep the engine running

When the front-month option expires or decays, traders often sell another short option against the long leg. If price moves far away, you can close or adjust the long strike.

Diagonal adjustments

If price trends higher, you can roll the short call up and out while keeping the long call. This keeps your delta aligned and keeps collecting time decay.

Who This Is For

Traders who understand vertical spreads and want to learn how different expirations can create trades that profit from time decay and volatility.

Learning Objectives

  • • Explain the difference between a calendar (same strike) and a diagonal (different strikes) spread.
  • • Understand why the short leg decays faster than the long leg, creating a theta advantage.
  • • Recognize that time spreads are positive vega—they benefit from rising volatility.
  • • Describe the “tent” profit shape and how it shifts between calendars and diagonals.
  • • Know how to manage the spread by rolling the short leg after it decays.

Risk Note

Calendars and diagonals are debit trades—your max loss is typically the debit paid. However, if the stock moves far from the short strike, both legs can lose value simultaneously. If IV drops sharply, the long leg loses more than the short leg gains, creating unexpected losses even in range.

Example Walkthrough

Scenario — Calendar spread: XYZ is at $100. You sell the 30-day $100 call for $2.80 and buy the 60-day $100 call for $4.20. Net debit: $1.40 ($140 total).

Best case: XYZ stays near $100 at front expiration

Short call expires worthless ($0). Long call retains ~$3.00 of value. Profit ≈ ($3.00 − $1.40) × 100 = +$160.

Worst case: XYZ moves to $115 or $85

Both legs are far from the strike and lose most of their value. Max loss ≈ debit paid = −$140.

Key insight: The calendar profits most when price stays near the short strike, maximizing the difference in decay rates between the two expirations.

Common Mistakes

Ignoring IV risk on the long leg

If IV drops sharply, the long-dated option loses more value (higher vega) than the short-dated option gains. This can hurt even if price stays in range.

Choosing too narrow an expiration gap

If the two expirations are too close (e.g., 7 days apart), the decay differential is small and the trade barely generates theta.

Holding past front-month expiration without a plan

After the short leg expires, you are left with a naked long option that decays quickly. Either sell a new short leg or close the position.

Quick Recap

  • • Calendars use the same strike with different expirations; diagonals shift the long strike for a directional bias.
  • • Both are positive theta (short leg decays faster) and positive vega (rising IV helps the long leg more).
  • • Best when price stays near the short strike. Roll the short leg to keep the decay engine running.

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Butterflies

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Target a precise price with a defined-risk profit tent and strong gamma near the strike.

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