What is a calendar spread?

In a typical calendar spread, one would buy a longer-term contract and go short a nearer-term option with the same strike price. If two different strike prices are used for each month, it is known as a diagonal spread . Calendar spreads are sometimes referred to as inter-delivery, intra-market, time spread, or horizontal spreads .

What is a reverse calendar spread?

A reverse calendar spread takes the opposite position and involves buying a short-term option and selling a longer-term option on the same underlying security. The purpose of the trade is to profit from the passage of time and/or an increase in implied volatility in a directionally neutral strategy.

Why can't I calculate break-even for a calendar spread?

The break-even for a calendar spread cannot be calculated due to the different expiration cycles being used. The long option will still remain when the short option expires, and we don’t know how much extrinsic value that option will have.

Is a long calendar spread a directional trading strategy?

A long calendar spread is a neutral trading strategy though, in some instances, it can be a directional trading strategy. It is used when a trader expects a gradual or sideways movement in the short term and has more direction bias over the life of the longer-dated option.