Strota / Calendar Spread — Trading Time Decay Differential

Calendar Spread — Trading Time Decay Differential

Sell near-dated option + buy same-strike far-dated option. Profit from differential Theta and IV expansion.

Calendar spread = sell near-dated option + buy same-strike far-dated option. Profits from differential time decay (near-dated bleeds faster than far-dated) AND from IV expansion (far-dated has more Vega).

Best in sideways markets ahead of a known catalyst. Underused by retail because the setup is subtle — but in the right regime, calendars produce very clean P&L.

Worked NIFTY example

NIFTY at 22,000. Monthly expiry next month and a known event between now and then.

Sell 22,000 CE current-week at ₹100 + Buy 22,000 CE next-month at ₹250. Net debit = ₹150 × 25 = ₹3,750 per lot.

If NIFTY stays near 22,000 by next-week expiry, the near-dated decays toward zero (yours to keep) while the next-month retains most of its value. The position gains.

If IV expands (e.g. before the upcoming event), the far-dated leg's Vega lifts the position further — you profit even without time decay.

When calendar spreads work

Sideways near-term markets. No big moves expected before near-dated expiry.

Low current IV with a catalyst ahead. The far-dated leg captures IV expansion as the event approaches.

ATM strike selection. Calendar spread Theta is maximised at-the-money — straying from ATM weakens the trade.

Greeks profile

Net Delta: small (depends on strike vs spot — at ATM, near zero). Net Gamma: slightly negative (short near-dated has higher gamma than long far-dated). Net Theta: positive (near-dated bleeds faster). Net Vega: positive (far-dated has more Vega).

The 'positive Theta + positive Vega' combo is unusual — most strategies have one or the other. Calendar spreads are one of the few setups that capture both.

What to do with this: Watch the calendar carefully on near-dated expiry day. If NIFTY drifts away from the strike, the near-dated may have lost most of its value (good) but the far-dated has also lost some (bad). Close the spread once near-dated is mostly decayed — usually 1 day before its expiry.

Common misreads

Choosing strikes far from spot. Calendar Theta peaks at ATM — far-strike calendars have weak Theta differential.
Holding through the near-dated expiry. The near-dated either gets assigned (losing intrinsic value) or expires worthless — both ways, you should close before.
Building calendars in high-IV regimes. The far-dated leg is expensive and won't benefit from further IV expansion — you're paying peak premium.

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Key takeaways

Sell near-dated + buy same-strike far-dated. Net debit.
Profits from differential Theta AND IV expansion.
Best in sideways markets with an upcoming catalyst.
ATM strikes maximise Theta differential.
Close near the near-dated expiry to avoid pin risk.

Calendar spread — what to ask

When to roll a calendar spread?

When the near-dated expiry approaches and you want to keep the long far-dated leg active. Sell the next-week option at the same strike to recreate the calendar with a new near-dated. Each roll resets the time decay differential.

Can I do a calendar with stock options?

Yes but trickier — stock option liquidity is thinner, especially in far-dated months. Calendars on liquid index options are usually cleaner.

Diagonal calendar vs regular calendar?

Diagonal = different strikes for the near and far legs. Adds directional bias. Regular calendar = same strike both legs, pure time-decay play.

How much margin?

Typically ₹15,000-30,000 per lot — much less than short strangles because the long leg offsets a lot of the margin requirement of the short leg.

Best month combinations?

Sell weekly + buy monthly is most common. Sell monthly + buy three-months-out for longer-horizon Vega bets. Weekly + far-month gives the cleanest Theta differential.

Build a calendar spread →