Learn Calendar and Diagonal Spreads: Mastering Time-Based Options Strategies
Welcome to Article 6 of the Learn Options Series, where we introduce time-based strategies that add another layer of control and opportunity to your stock options education. These setups go beyond simple directional trades by incorporating the powerful element of time decay to your advantage.
If you’re advancing in your journey of learning options, calendar and diagonal spreads can help you profit from volatility, timing, and price movement with a sophisticated but accessible approach.
What Are Calendar and Diagonal Spreads?
Both strategies involve options with different expiration dates (unlike vertical spreads which share the same expiry).
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Calendar Spreads: Same strike, different expirations
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Diagonal Spreads: Different strike and different expiration
Both are ideal for traders who want to benefit from time decay (Theta) and changes in volatility (Vega).
Calendar Spreads (Time Spreads)
When to Use It:
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You expect the stock to stay near a specific price (neutral outlook)
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You want to benefit from faster time decay in the short-term option
Structure:
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Sell a near-term option
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Buy a longer-term option (same strike)
Example:
Stock ABC trades at $60.
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Sell 1-week $60 call for $1.00
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Buy 1-month $60 call for $2.50
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Net Debit = $1.50
Goal: The stock remains close to $60 by the short option’s expiration
Why It Works:
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Short option decays faster → You profit as long as the stock stays near the strike
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A controlled way to benefit from time decay and volatility expansion
Diagonal Spreads
When to Use It:
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You expect directional movement and want to take advantage of time decay
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You want to build a longer-term position while managing near-term exposure
Structure:
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Sell a short-term option (near-term expiration)
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Buy a longer-term option at a different strike (usually in the direction of your bias)
Example:
Stock XYZ is at $55.
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Sell 1-week $57 call for $1.10
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Buy 1-month $60 call for $2.30
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Net Debit = $1.20
Goal: Stock rises toward—but not far beyond—$57 in the near term
Why It Works:
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Combines the Vega benefit of long-dated options with the Theta decay of short-dated options
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Lets you trade a directional setup while earning short-term premium
Pros of Calendar and Diagonal Spreads in Stock Options Education
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Time Advantage: Profit from the difference in time decay between short and long legs
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Volatility Play: A rise in implied volatility benefits these strategies
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Defined Risk: Net debit paid is the maximum potential loss
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Strategic Flexibility: You can roll or adjust based on movement
Watch Outs for Learners
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Rapid Movement Can Hurt: These are best when the stock doesn’t move too aggressively
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IV Crush: If implied volatility drops suddenly, the long leg can lose value
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Liquidity Considerations: Rolling requires active management
Wrapping Up: Learning Options Through Time-Based Spreads
Calendar and diagonal spreads help you take your options trading beyond simple buying or verticals
