Neutral Calendar Spread

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The Neutral Calendar Spread strategy involves buying long term calls and simultaneously writing an equal number of near-month at-the-money or slightly out-of-the-money calls of the same underlying security with the same strike price.

The options trader applying this strategy is neutral towards the underlying for the short term and is selling the near month calls to profit from their rapid time decay.

Limited Profit Potential

At the near-term expiration, profit equals the remaining long call’s market value less any short-call settlement or closing cost and the original net debit. Being near the shared strike can help, but maximum profit and breakeven depend on the long call’s residual value and market inputs, not only the collected premium.

Neutral Calendar Spread Payoff Diagram

Try the Neutral Calendar Spread Calculator

This original illustration is a possible model shape. Its value and breakeven points depend on the remaining option’s price and volatility assumptions.

Limited Downside Risk

The entry debit is commonly used as a theoretical risk measure for a matched long calendar maintained as a hedge. In the worked scenario, both options eventually expiring worthless loses that debit before costs. Early assignment, financing, dividends and later changes to the position can affect actual outcomes.

Example

In June, an options trader believes that XYZ stock trading at $40 is going to trade sideways for the next few months. He enters a Neutral Calendar Spread by buying a OCT 40 call for $400 and writing a JUL 40 call for $200. The net investment required to put on the spread is a debit of $200.

Suppose XYZ closes at $40 at the July expiration and the short JUL 40 call expires worthless. If the longer-dated OCT 40 call can then be sold for $350, the result is $350 − $200 = $150 profit before costs. The $350 remaining option value is an explicit assumption; it is not determined by the stock finishing at $40.

If XYZ instead declines to $37 and remains there until October, both original calls can expire worthless. With no further trades, the loss is the $200 opening debit before costs. Selling additional calls might still be possible, but their price and obligations would change the position and must be evaluated separately.

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 Neutral Calendar Spread trader thinks that the underlying volatility will remain low, then he may wish to enter another Calendar Spread by writing another near term call.

If he thinks that the volatility is likely to increase significantly, he may wish to hold on to the long term call to profit from any large upward 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

The worked examples exclude commissions, fees and financing costs. Include entry, exit and any rolling costs for every leg when evaluating an actual trade.

Similar Strategies

These strategies offer related ways to express a market outlook. Their payoff, assignment exposure and response to changing volatility can differ substantially.

Long Put Butterfly

Iron Condors

Iron Butterfly

Bull Calendar Spread

If the options trader is bullish on the underlying stock, he can instead implement the bull Calendar Spread strategy to sell the near month calls as a means to ride the long call for a discount.

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.