What is a 'calendar spread' in option trading?

Option trading strategies offer traders and investors the opportunity to profit in ways not available to those who only buy or sell short the underlying security. One such strategy is known as the "calendar spread," sometimes referred to as a "time spread."

When should you use a long calendar spread?

A long calendar spread is a good strategy to use when you expect the price to be near the strike price at the expiry of the front-month option. This strategy is ideal for a trader whose short-term sentiment is neutral. Ideally, the short-dated option will expire out of the money. Once this happens, the trader is left with a long option position.

What is the difference between a calendar and a diagonal spread?

The main difference in a calendar vs a diagonal spread is that you are not trading the same strike price although you are still trading different expiration periods. A calendar is also a neutral trade, whereas a diagonal spread will have a directional exposure. That could be positive delta or negative delta depending on how the trade is set up.