What is a "calendar spread" in options trading?

A calendar spread in options trading involves buying and selling options that have the same strike price but different expiration dates. This strategy allows traders to take advantage of the differences in time decay and volatility between the two options. The option with the nearer expiration will decay faster than the one with the longer expiration. By entering a calendar spread, a trader can profit from the expected change in implied volatility as the nearer expiration approaches.

This strategy is often used when a trader believes that the stock price will remain close to the strike price at the time of the near-term expiration, but there is uncertainty about future movements. The ability to capitalize on varying time values and implied volatilities makes this approach a popular choice among traders looking to manage risk while potentially generating income.

The other options do not accurately describe the calendar spread; for example, buying options at different strike prices describes a vertical spread, while selling calls and puts simultaneously refers to a straddle or strangle strategy. Investing in long-term options exclusively doesn’t capture the essence of a calendar spread, which is focused on the timing of expirations rather than the length of the investment.