Calendar Spread Parameters

$
Current market price per share
$
Same strike for both legs
Short leg expiration (sell this call)
Long leg expiration (buy this call)
%
Annualized implied volatility (same for both legs)
$
Premium for the short near-term call
$
Premium for the long longer-term call
%
Annualized risk-free rate
%
Annualized dividend yield
Each spread = sell 1 near-term call + buy 1 long-term call (×100 shares)

Calendar Spread Quick Reference

P/L at Near-Term Expiry (per share):

BScall(S, K, Trem, r, σ, q) − max(S−K, 0) − Net Debit

Key Formulas:

  • Net Debit = Long Premium − Short Premium
  • Total Cost = Net Debit × 100 × Contracts
  • Max Loss ≈ Total Cost (computed numerically; can exceed debit with dividends)
  • Max Profit ≈ at S ≈ K, near-term expiry (computed numerically)
  • K = Strike price (same for both legs)
  • Trem = Time remaining on long leg after short expires
  • σ = Implied volatility

Key Metrics

Net Debit (per share) --
Total Cost --
Max Profit --
Max Loss --
Lower Breakeven --
Upper Breakeven --

Formula Breakdown

Net Debit = Long Premium − Short Premium
P/L = BScall(S, K, Trem) − max(S−K, 0) − Net Debit

P/L Diagram

Ryan O'Connell, CFA
CALCULATOR BY
Ryan O'Connell, CFA
CFA Charterholder & Finance Educator

Finance professional building free tools for options pricing, valuation, and portfolio management.

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Understanding the Calendar Spread

How the Calendar Spread Works

A long call calendar spread (also called a horizontal spread or time spread) involves selling a near-term call option and buying a longer-term call option at the same strike price. The strategy profits from the difference in time decay between the two legs: the near-term short call loses value faster than the longer-term long call.

The net cost (debit) is the difference between the long-term premium paid and the near-term premium received. This debit typically approximates your maximum risk, though the model can show slightly larger losses under certain dividend and European-pricing assumptions. The goal is for the near-term call to expire worthless (or near-worthless) while the long-term call retains significant time value.

Reading the P/L Diagram

Unlike vertical spreads that produce a piecewise-linear (kinked) payoff at expiration, the calendar spread produces a smooth bell-shaped curve. This is because at near-term expiration, the long call still has time remaining and its value is determined by Black-Scholes pricing -- not just intrinsic value.

The solid blue curve (At Near-Term Expiry) peaks near the strike price, where the short call expires worthless (or near-worthless) and the long call retains the most time value. Moving away from the strike in either direction reduces profit because the short call gains intrinsic value (above the strike) or the long call loses time value (far from the strike).

The dashed dark blue curve (Today / T+0) shows a wider, flatter bell. Both legs still have significant time value at trade entry, so the position's sensitivity to stock price movement is lower than at near-term expiration.

Key Risk Factors

  • IV Collapse: The calendar spread is a net long vega position. A drop in implied volatility after entry hurts the long leg more than the short leg, reducing the spread's value.
  • Early Assignment: The short near-term call can be assigned early with American-style options, especially when the call is deep in-the-money near an ex-dividend date. This creates operational complexity even though the long call limits overall risk.
  • Gap Risk: A large gap move in either direction can cause the short call to move deep in-the-money or the long call to lose most of its time value, increasing losses beyond the net debit paid.
Model Assumptions: This calculator uses the Black-Scholes model which assumes European-style exercise. In practice, American-style options allow early exercise of the short call. The model also assumes constant volatility across both expirations; in reality, implied volatility varies by expiration date (term structure) and by strike (skew). This calculator uses a single IV for both legs, which is a simplification. The risk-free rate and dividend yield are assumed constant over the life of both options.

Frequently Asked Questions

A calendar spread (also called a horizontal spread or time spread) involves selling a near-term call option and buying a longer-term call option at the same strike price. The strategy profits from the difference in time decay between the two options: the near-term short call loses value faster than the longer-term long call. This calculator models call calendar spreads; for at-the-money calendars, put versions have nearly identical P/L profiles due to put-call parity.

The maximum loss is approximately the net debit paid (long premium minus short premium), multiplied by 100 shares per contract and the number of contracts. Under European pricing with dividends, the modeled loss can slightly exceed the net debit. The maximum profit occurs when the stock price is near the strike price at near-term expiration, where the remaining long call retains the most time value relative to the expired short call. Both max profit and max loss are computed numerically because the remaining long option still has time value at near-term expiry.

Unlike vertical spreads, calendar spread breakevens have no closed-form formula. They must be found numerically because the P/L at near-term expiration depends on the Black-Scholes value of the remaining long call, which creates a smooth bell-shaped curve rather than a piecewise linear payoff. Two breakeven points exist: one below the strike and one above the strike. The stock must stay between these two breakeven prices at near-term expiration for the position to be profitable.

A calendar spread is a net long vega position, meaning it benefits from an increase in implied volatility after entry. The long-term option has higher vega than the near-term option, so a rise in IV increases the value of the long leg more than the short leg. Higher IV at entry makes the spread more expensive to establish. A decrease in IV after entry hurts the position because the long call loses more value than the short call gains.

Use IV mode for full analysis: it enables the P/L chart and computes max profit, max loss, and breakeven prices using Black-Scholes. Both the near-term expiration curve and the Today (T+0) curve require Black-Scholes pricing for the remaining long option, so neither can be drawn without implied volatility. Use premium mode when you want to verify the cost of the trade using known market premiums. In premium mode, only the net debit, total cost, and approximate max loss are shown.

The short near-term call can be assigned early with American-style options, especially when the call is in-the-money near an ex-dividend date. If assigned, you must deliver 100 shares per contract but still hold the long-term call. You can exercise the long call, sell it, or buy shares to cover. The long call limits your total risk, but early assignment can create temporary margin requirements and operational complexity. Many traders close or roll the short leg before expiration to avoid assignment.

A calendar spread is best used when you expect low near-term volatility and the stock to stay near the strike price through near-term expiration. The strategy benefits from time decay because the near-term short call decays faster than the longer-term long call. Common scenarios include trading around events (sell the pre-event expiration, keep post-event exposure), range-bound stocks, and periods where you expect volatility to increase after near-term expiration. The strategy works best with stable stocks in defined price ranges.
Disclaimer

This calculator is for educational purposes only. Options trading involves significant risk of loss. Actual option prices and P/L may differ due to market conditions, bid-ask spreads, dividends, early exercise (American options), and other factors. The Black-Scholes model makes simplifying assumptions including constant volatility and European-style exercise. This is not financial advice. Consult a qualified professional before making investment decisions.

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