Calendar Spread - Uses

Uses

The calendar spread can be used to attempt to take advantage of a difference in the implied volatilities between two different months' options. The trader will ordinarily implement this strategy 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, a rise in the overall implied volatility of a market's options during the trade will tend very strongly to be to the trader's advantage, and a decline in implied volatility will tend strongly to work to the trader's disadvantage.

If the trader instead buys a nearby month's options in some underlying market and sells that same underlying market's further-out options of the same striking price, this is known as a reverse calendar spread. This strategy will tend strongly to benefit from a decline in the overall implied volatility of that market's options over time.