Calendar Spread Strategy with Example

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Calendar Spread Strategy (Time Spread)  with Nifty Example

What is a Calendar Spread?

A Calendar Spread (also called a Time Spread) is an options strategy where you:

  • Sell a near-month option

  • Buy a far-month option

  • Same strike price

  • Same type (Call or Put)

This strategy benefits from time decay (Theta) and volatility changes.

It is mainly used when you expect the market to stay range-bound in the short term, but may move later.

Example: Nifty Call Calendar Spread

  • Nifty Current Level: 25600

  • Sell Feb 25600 CE @ 200

  • Buy March 25600 CE @ 350

Net Premium Paid

350 – 200 = 150 points (Debit Strategy)

So your maximum risk = 150 points

How This Strategy Works

  • The near-month option (Feb) decays faster.

  • The far-month option (March) decays slower.

  • If Nifty stays near 25600 till Feb expiry:

    • Feb option loses value quickly.

    • March option still holds time value.

    • You benefit from the difference.

Maximum Profit

✔️ Limited but attractive
✔️ Occurs if Nifty expires near the strike price (25600) in Feb expiry.

Profit depends on:

  • Time decay

  • Implied volatility

  • Distance from strike

Maximum Loss

❌ Limited to Net Premium Paid
= 150 points

Occurs if market makes a very big move before near expiry.


When to Use Calendar Spread?

✔️ When market is expected to consolidate
✔️ When short-term volatility is high
✔️ When expecting volatility increase in far month
✔️ Before event in next expiry

Advantages (Pros)

✅ Limited risk
✅ Benefits from time decay
✅ Lower capital requirement
✅ Good for range-bound markets

Disadvantages (Cons)

❌ Limited profit
❌ Complex pricing behavior
❌ Sensitive to volatility changes
❌ Requires proper timing

Professional Trading Insight

As a professional trader:

  • Best entry when near-month IV is high

  • Avoid when market is trending strongly

  • Manage position before near expiry

  • Can convert into diagonal spread if needed

Final Conclusion

The Calendar Spread is ideal for traders who expect:

  • Short-term consolidation

  • Controlled movement

  • Time decay advantage

In our example:

  • Risk = 150 points

  • Best outcome = Nifty near 25600 at Feb expiry

  • Profit = Limited but strategic

This is a smart strategy for traders who understand volatility and time decay dynamics.

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