Equity and Index Options Explained

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Calendar Spreads

The following four chapters will consider calendar spreads. These involve trading options with different expiry dates against one another, hence their alternative name of “time spreads”. Just as call and put spreads are sometimes known as “vertical” spreads, calendars are sometimes referred to as “horizontal” spreads.

What is a calendar spread? A calendar spread involves two options with the same strike but different expiry dates traded against one another. We can trade both call calendars (a longer-dated call against a shorter-dated call) and put calendars (a longer-dated put against a shorter-dated put). Buying a calendar spread involves buying a more expensive, longer-dated option and selling a cheaper, shorter-dated option against it. Selling a calendar involves selling a longer-dated option and buying a shorter-dated option against it. This is the market convention.

Whatever we are doing with the longer-dated leg (i.e. buying or selling) is what we are doing with the calendar. If we are buying the longer-dated leg, we are buying the calendar, and vice versa. Note that this is the exact opposite of the market convention for quoting futures spreads. In the futures markets, whatever we are doing with the nearer-dated future is what we are doing with the spread. For example, if we are buying a Sep/Dec FTSE futures spread, we are buying Sep and selling Dec. For the sake of avoiding errors, it is worth spelling out to your broker exactly what you want to do with ...