What is a calendar spread?

In a typical calendar spread, one would buy a longer-term contract and go short a nearer-term option with the same strike price. If two different strike prices are used for each month, it is known as a diagonal spread . Calendar spreads are sometimes referred to as inter-delivery, intra-market, time spread, or horizontal spreads .

What is a debit spread?

A debit spread is an options strategy of buying and selling options of the same class and different strike prices at the same time. The result of the transaction is debit to the investor account. Many types of spreads involve three or more options but the concept is the same.

Why can't I calculate break-even for a calendar spread?

The break-even for a calendar spread cannot be calculated due to the different expiration cycles being used. The long option will still remain when the short option expires, and we don’t know how much extrinsic value that option will have.

What is a reverse calendar spread?

A reverse calendar spread takes the opposite position and involves buying a short-term option and selling a longer-term option on the same underlying security. The purpose of the trade is to profit from the passage of time and/or an increase in implied volatility in a directionally neutral strategy.