In finance, a calendar spread is a name that is given to a futures/option spread trade that is involved in the purchase of futures/options of an underlying market expiring in some named month, and simultaneously it is also involved in the sale of other futures/options of the same underlying market and the same striking price (that is applicable in case of options as futures do not have any strike price) in a different month.

The usual calendar spread, that is also referred to as a time spread or horizontal spread, involves the purchase of futures/options of a named strike price expiring in a more distant month and the sale of futures/options that has the same strike price that expire in a more nearby month.

The calendar spread is a kind of strategy that is used by the trader for making an attempt to take advantage of a difference that is present in the implied volatilities between two different months’ options. This strategy is implied by the trader when the options he is buying have a distinctly lower implied volatility than the options he is writing (selling).

In the typical version of this strategy, the trader will get an advantage in case of a rise in the overall implied volatility of a market’s options during the trade, and in case if there is any decline in implied volatility then it will tend strongly to work to the trader’s disadvantage.

Instead of that if the trader, in some underlying market buys a nearby month’s options and sells that same underlying market’s further-out options of the same striking price, this is referred to as a reverse calendar spread. This strategy will cause a benefit to trader from a decline in the overall implied volatility of that market’s options over time.

A trader can implement calendar spread either using call options or put options, but it can never be implemented with calls and puts used together in the same trade.

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