Calendar Spread: how the position works

Sell a near-dated option and buy a longer-dated one at the same strike. The near leg decays faster than the far leg, and the difference is the profit. It is the one structure here whose payoff cannot be drawn as straight lines, because at the near expiry the far leg is still alive and must be valued by a model rather than by arithmetic. That is also why it is the only one on this list with no closed-form maximum profit.

Market view: Neutral — long volatility of time
Opened for: Debit
Maximum profit: No closed form. It occurs with the underlying at the strike on the near expiry, and its size depends on the far leg's implied volatility at that moment — which is unknown when you enter.
Maximum loss: The net debit paid, approached if the underlying moves far from the strike either way.
Breakeven: Two, either side of the strike, and both are model-dependent rather than arithmetic. Use the payoff curve on this page rather than a formula.

How it is built

Sell 1 option at strike K expiring at T₁
Buy 1 option at the same strike K expiring at T₂, T₂ > T₁

All figures above are quoted per share and settle at expiry. A standard equity option covers 100 shares, so multiply by 100 for a single contract.

Before expiry: the Greeks

Long vega, because the far leg has more of it than the near leg — this position wants implied volatility to rise, which distinguishes it from every other neutral structure here. Positive theta while the underlying is near the strike. Negative gamma near the strike as the near expiry approaches. It is also exposed to the shape of the term structure, not merely its level: the two legs can reprice differently even with the underlying still.

When to use it

When you expect the underlying to sit near a level in the short term but volatility to rise later — a quiet stretch before a known event beyond the near expiry is the textbook case. Selling the front month into an event and owning the back month is how the structure is usually built around earnings.

What goes wrong

A large move either way loses the debit, and the position is at its most vulnerable to being wrong about calm rather than about direction.
Term-structure risk: a fall in back-month implied volatility can produce a loss with the underlying exactly where you wanted it.
Early assignment on the short leg leaves an unhedged position in the underlying against a long option, which is not the same risk you entered.
The two legs have different expiries, so this cannot be closed as a single guaranteed unit at the near expiry.

A worked example

SPY at 580. Sell the 580 call expiring in 14 days for 6.40, buy the 580 call expiring in 49 days for 11.20.

Net debit paid: $4.80 per share — $480
Maximum loss: $480, if SPY moves far from 580 by the near expiry
Best case: SPY at exactly 580 on day 14, with back-month volatility unchanged or higher
Position after the near expiry: A long 49-day 580 call, if you let the short leg expire

Commissions, exchange fees, financing and the bid/ask spread are excluded. On a multi-leg position the spread is usually the largest of these. The profit at the near expiry depends on the back month's implied volatility and cannot be computed from the strikes alone.

Common questions

Why is there no maximum profit formula?

Because when the short leg expires the long leg still has time value, and time value is a model output, not an arithmetic identity. Every other structure here settles entirely at one expiry, which is what makes their payoffs solvable in closed form.

Calls or puts?

At the same strike they behave almost identically. Choose the out-of-the-money side for tighter markets and to reduce the chance of early assignment on the short leg.

Related strategies

Educational only. This page explains how a structure behaves; it is not a recommendation to trade it. Options and futures carry substantial risk, and short and leveraged positions can lose more than the amount originally invested.