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2006issue C011

Calendar spread expiration, assignment and time skew

A calendar spread buys a longer-dated option and sells a shorter-dated option at the same strike. The short option is meant to lose time value faster. Assignment, leftover long exposure, and time skew then set what the remaining book is worth.

  • A calendar spread buys a longer-dated option and sells a shorter-dated option at the same strike, using a put calendar for a downward view or a call calendar for an upward view.
  • The shorter-dated option is meant to lose time value faster. If it expires with no value, the remaining book can sell another short-dated option, close the position, or hold the long option.
  • An in-the-money short put is assigned at expiration, so the holder must buy the underlying at the strike or exercise the long put. Closing or a roll-down before expiration is the usual way to avoid assignment.
  • Time skew can make the sold short-dated leg relatively expensive through implied volatility, but an event-driven gap that pushes both legs in the money is treated as more important than the skew.
Entries in this reading3 entries
Current trackOptions calendar spread30 readingsOption expiration analysis38 readingsImplied volatility analysis176 readings

A same-strike calendar with two expirations

A calendar spread is constructed by buying a longer-dated option and selling a shorter-dated option that share the same strike. A put calendar is used when the working view on the underlying is downward. A call calendar is used when the working view is upward.

The construction premise is that the shorter-dated option loses time value faster than the longer-dated option.

The book after the short option expires

If the short option expires with no value, the remaining book can sell another short-dated option, close the position, or hold the long option.

A sharp move away from the strike can cut the longer-dated option's value by more than the credit kept from the short option.

Assignment on an in-the-money short put

In the supplied put example, the underlying is near 45. The calendar buys a January 40 put for 3.50 and sells an October 40 put for 1.50.

At short expiration, an in-the-money short put is assigned. The spread holder must buy the underlying at the strike or exercise the long put.

Closing the spread or a roll-down to a lower strike before expiration is presented as the usual way to avoid assignment.

Time skew and implied volatility

A time skew is a difference in implied volatility between expiration months. The most common pattern is higher implied volatility in the short-dated month than in the longer-dated month.

Because implied volatility is a price input, a short-dated implied-volatility premium makes the sold calendar leg relatively expensive versus the purchased longer-dated leg.

An event-driven gap can drive the underlying through the shared strike and put both legs in the money. The underlying path is treated as more important than the skew.

Educational research material, not investment advice. Historical source context does not establish present-day performance.
9 of 21 in the Options calendar spread track
20081-2 pp.Next on Options calendar spreadThe two clocks that close a calendar or a stock-plus-putUnder strategy-based margin, long stock is typically charged at 50 percent of value and a protective put is charged in full, with no reduction for the put that protects those shares.
All readings on this track · 21 readings
  1. 1994Competing-bid calendar spreads and implied volatility
  2. 2001Calendar spreads as range overlays with wing repairs
  3. 2002Covered-call premium budgets and calendar-style rolls
  4. 2002Calendar-spread construction from time decay and implied volatility
  5. 2003Calendar ratio backspread construction for range and breakout regimes
  6. 2005Read the implied-volatility regime before calendar-spread assignment
  7. 2005Constructing calendars and straddles around implied volatility
  8. 2005Short option coverage through calendars, rolls, and expiration
  9. 2006Calendar spread expiration, assignment and time skew
  10. 2008The two clocks that close a calendar or a stock-plus-put
  11. 2010Cheap back-month implied volatility is a regime question, not a shopping rule
  12. 2010Calendar-spread assignment as a volatility regime shift
  13. 2010Uncapped collar overlays and earnings-week short calendars
  14. 2011Sequencing verticals, straddles, and calendars as construction tests
  15. 2012Executing conversion and ratio calendar option packages
  16. 2015Near-expiry options on new-crop grain futures
  17. 2018Calendar spreads as range and volatility regime trades
  18. 2019A directional put calendar after a failed resistance breakout
  19. 2019Sizing short-option risk with calendar puts
  20. 2019Limited-risk reversal construction
  21. 2020Covered-call writing versus a calendar call diagonal
By fieldOptions and volatility435 readingsBy year2006150 readings
All 30 readings tagged Options calendar spread
Also on Options calendar spread5 readings
2010Cheap back-month implied volatility is a regime question, not a shopping rule2018Calendar spreads as range and volatility regime trades2004Calendar construction from exercise style, time budget, and carry2005Short option coverage through calendars, rolls, and expiration2015Near-expiry options on new-crop grain futures