A calendar spread, also known as a time spread or horizontal spread, is an options trading strategy that involves buying and selling options of the same type (calls or puts) with the same strike price but different expiration dates. Typically, traders sell the near-term option and buy the longer-term option, creating a position that profits from time decay and changes in implied volatility.

This strategy is designed to capitalize on the different rates of time decay between options with different expiration dates. The short-term option experiences faster time decay (theta), while the longer-term option retains more of its time value. Calendar spreads work best when the underlying asset remains near the strike price at expiration of the short option, allowing maximum profit from the time decay differential.

Real-world example: A trader creates a calendar spread by selling a 30-day Apple $150 call option and buying a 60-day Apple $150 call option, profiting if Apple’s stock stays near $150 over the next month.