How the structure is built
In a long calendar you sell the near-expiry option and buy the far-expiry option at the same strike and option type. The far option costs more, so you pay a net debit. That debit is the most a standard long calendar can lose, which makes the risk defined.
The position is typically placed close to the money, because that is where the difference in time decay between the two expiries is largest. You can build it with calls, puts or both (a straddle calendar), and with different lot ratios on each leg.
| Item | Long calendar |
|---|---|
| Legs | Sell near expiry, buy far expiry, same strike |
| Cost | Net debit (far premium minus near premium) |
| Time decay | Positive when near decays faster than far |
| Volatility | Long vega: gains if IV rises, loses if it falls |
| Best case | Underlying near the strike when the near leg expires |
| Main risk | A large move away from the strike or a fall in IV |
Net premium and the debit
With lots on each side, the net premium is far lots × far premium minus near lots × near premium. A positive figure is a debit and a negative figure is a credit. The change in net premium through a session shows how the spread is repricing: it rises if the far leg gains on the near leg, for example when IV rises or spot moves toward the strike.
IV term edge
Each expiry has its own implied volatility. The IV term edge is the far-expiry IV minus the near-expiry IV at the strike. Near-expiry IV above far-expiry IV (a negative edge) is an inverted or backwardated term structure, typical around events, and means the leg you sell is priced richer than the leg you buy. A positive edge is a normal upward-sloping structure.
The edge matters because the two legs reprice by different amounts when IV changes. The far leg has more vega, so it moves more for the same change in implied volatility. Read the edge together with the debit, not on its own.
Net theta and net vega
- Net theta is the far leg's theta times its lots minus the near leg's theta times its lots. A positive figure means the structure gains from decay overall because the near leg you sold decays faster.
- Net vega is the far vega minus the near vega, adjusted for lots. Positive net vega means a rise in IV helps the spread and a fall hurts it.
- Decay near and far shows the modelled daily decay of each leg. The gap between them is the carry the structure aims to capture.
Theta and vega on the chart are model estimates from the option chain. They are not guaranteed daily profit or loss.
Open interest and liquidity
A calendar needs two liquid legs. Compare open interest and traded volume on both expiries at the strike. A thin far-expiry leg can make the last traded price a poor guide to the real cost of the spread, and widens the cost of adjusting it later.
Limits and risks
- A large move hurts. If the underlying travels far from the strike, the difference in decay shrinks and the structure can lose most of its debit.
- IV falls hurt. A drop in implied volatility in the far expiry reduces the value of the leg you own.
- Near expiry is when the near leg's gamma peaks, so small moves in spot can swing the net value sharply.
- Assignment and expiry mechanics differ for index and stock options; check the rules for the contract you use.