What it is
Two options of the same type at the same strike, with different expiry dates. You sell the nearer one and buy the later one. The later option costs more, because it has more time left, so the trade opens for a debit, and that debit is close to the most it can lose. It is also called a time spread or a horizontal spread.
The whole idea is that the two options age at different speeds. An option loses time value slowly when it has months to go and quickly in its last few weeks. Over the next month, the near option should lose much more of its value than the far one, and that difference is the profit.
What has to happen for it to make money
The stock has to be near the strike when the near option expires. At that moment the sold option is worth little or nothing, and the bought one still has a month of time value, which is greatest at the strike. Move far enough in either direction and the later option's time value thins out too, until the spread is worth less than it cost.
Unlike the other range trades on this site, rising volatility helps. The later option is the more sensitive to it, so a market that grows more nervous lifts the spread's value. That is why the chart can only show one assumption: if volatility falls by the time the near option expires, the whole curve sinks, even with the stock right on the strike.
Once it is on
Most calendars are closed around the near expiry, by selling the later option or buying back what is left of the near one together. Some traders instead keep the long option and sell another near-dated one against it, collecting the fast decay again, which is the same idea repeated.
If the near option is in the money as it expires, it can be assigned, leaving you short shares against an option that has not expired; closing before that day avoids the scramble.
What goes wrong
A big move either way. Far from the strike, both options behave alike and the spread collapses toward nothing, which loses most of the debit. The loss is limited to roughly what was paid.
A drop in volatility. Calendars are often opened when the near option is unusually expensive, such as before earnings. Once that passes, the long option can lose more value than expected, and a stock sitting perfectly still can still produce a loss.
Pros and cons
- Pro: the loss is about the size of the debit.
- Pro: paid by time passing near the strike.
- Pro: rising volatility helps, unusually for a time trade.
- Con: pays well only near one price.
- Con: falling volatility can turn a good outcome into a loss.
- Con: the payoff depends on a far option's price, not a fixed formula.
In Restrike
On the Portfolio the two calls fold into one row, a call calendar, with both expiries named. The Log keeps them as separate rows, since the near one closes first and the far one stays open; give both the same strategy label to score them as one trade. Import is read-only, and Restrike never places a trade.