The Calendar Straddle is implemented by selling a near-term Long Straddle while buying a longer-term straddle at the same strike, with the intention of benefiting from the near-term options’ time decay. The trader may expect little near-term stock movement. Profit also depends on changes in the value of the longer-dated options, so low realized volatility alone does not ensure a gain.
| Calendar Straddle Construction |
| Sell Near-Term Straddle Buy Long-Term Straddle |
Limited Profit Potential
A Calendar Straddle often benefits if the stock is near the shared strike at the first expiration, so the short options have little or no intrinsic value. The Long Straddle still has time remaining. Its value, and therefore the trade’s profit, depends on actual market conditions; it cannot be assumed to suffer only a small time-value loss.
After the Short Straddle expires or is closed, retaining the Long Straddle creates a different position. Its upside profit potential is unlimited, while its downside profit is finite for a stock that cannot fall below zero. Keeping it also risks losing its remaining market value.
Limited Risk
The entry debit is commonly used as the theoretical risk measure for a matched long calendar maintained as a hedge. A large stock move can make the near-term and longer-term straddles closer in value, but they need not be equal. Closing values, early assignment, dividends, financing and later management must be considered.
Example
In June, an options trader believes that XYZ stock trading at $40 is going to trade sideways over the next month or so. He enters a Calendar Straddle by buying an OCT 40 call for $200 and an OCT 40 put for $200 while simultaneously writing a JUL 40 call for $100 and a JUL 40 put for $100. The net investment required to implement the strategy is a debit of $200.
On near-term option expiration in July, suppose the stock is still trading at $40 and both written options expire worthless. If the October call and put can each be sold for $175, selling the Long Straddle returns $350. Subtract the $200 initial debit and the profit is $150 before costs. The $175 option prices are hypothetical assumptions, not values implied by the stock price alone.
If XYZ instead rises to $60 in July, the short July call has $2,000 of intrinsic value and the short put expires worthless. The original simplified example approximated the remaining October straddle at $2,000, which would offset that short-option liability and leave the $200 entry debit as the loss. In practice, the October options can retain additional value: if they sell for $2,050, the combined result is $2,050 − $2,000 − $200 = a $150 loss before costs. Use actual executable prices rather than assuming the longer-dated put and all remaining time value are worthless.
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Follow-up Action on Near-Term Expiration
Like all calendar strategies, it is necessary to decide on which follow-up action to take when the near-term options expire. This decision depends heavily on the revised outlook of the underlying stock at that time.
Should the options trader thinks that the underlying volatility will remain low, then he may wish to enter another Calendar Straddle by writing another near term straddle.
If he thinks that the volatility is likely to increase significantly, he may wish to hold on to the long term straddle to profit from any large price movement that may occur.
However, if the options trader is unsure of what to expect of the underlying, it may be best to take profit (or loss) and move on to evaluate other trading possibilities.
The examples use standard U.S. equity options. Exercise style, contract size and settlement can differ for ETF, index and futures options. Matching the contract terms and managing assignment are essential.
Commissions
Commission charges can make a significant impact to overall profit or loss when implementing option spreads strategies. Their effect is even more pronounced for the Calendar Straddle as there are 4 legs involved in this trade compared to simpler strategies like the vertical spreads which have only 2 legs.
Similar Strategies
These strategies offer related ways to express a market outlook. Their payoff, assignment exposure and response to changing volatility can differ substantially.
Value at the first expiration
Subtract the cost of closing or settling the short options and the original net debit from the market value of the remaining long options. Their remaining time value depends on price, implied volatility, time, rates, dividends and exercise terms. This is why a common-expiration intrinsic-value calculator cannot determine a calendar’s first-expiration result.
American-style short options can be assigned before expiration. Assignment can create a stock position, funding needs and dividend exposure. A protective long option is not automatically exercised. Closing a leg, rolling the short option or retaining the long option changes the position being evaluated.
OIC calendar-spread reference.
Advanced Strategy Variations
Build on the core strategies with these less common structures. Match the option legs and expirations when comparing names.
