Check Your Calendar [Spread] 

In this episode, Jeff Praissman sits down with Market Chameleon’s Dmitry Pargamanik to unpack the nuances of calendar spreads—how they work, when to use them, and what risks traders should watch for. From volatility outlooks to term structure signals, Dmitry shares actionable insights for both seasoned options traders and curious newcomers.

Summary – IBKR Podcasts Ep. 258

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Jeff Praissman 

Hi everyone, this is Jeff Praissman with Interactive Brokers Podcast. It’s my pleasure to welcome Market Chameleon’s Dmitry Pargamanik. How are you? 

Dmitry Pargamanik 

Hey Jeff, how are you? 

Jeff Praissman 

Always love this time of the month when you come in and do your webinar and then swing by our podcast studio afterwards to do a different dive into the same subject. What are we gonna talk about today? 

Dmitry Pargamanik 

Calendar spreads. 

Jeff Praissman 

Excellent. Excellent. I think we probably should start off—obviously, a lot of our listeners are heavy options traders—and explain what a calendar spread is. But we also, fortunately, pull in some newer traders, and that’s part of the goal of this—the outreach of the podcast—to get people interested in trading and options in general, to just learn more. Just listen to experts such as yourself. So, what is the difference between a… and a…? 

Dmitry Pargamanik 

Yeah, so it’s a good question. And the most popular strategies, probably: a vertical spread, like a bullish call spread or put spread. And the vertical spread is when you’re buying one option and selling another option on different strikes within the same expiration. So it’ll be buying one call, selling a different call, or buying a put and selling a different put within the same expiration. That’s a vertical spread. 

Calendar spread: you’re actually doing the same strike on two different expirations. That’s the major difference. Now you’re going cross-expiration but picking an option—let’s say, you’ll do like a call spread—and it’ll be a call in one expiration (buying or selling) versus buying or selling another call in a different expiration—same strike. 

Jeff Praissman 

Just to summarize it for our listeners: if you’re, say, buying a July 50 call and selling a July 60 call, that would be a vertical spread. But if, say, you’re selling a July 60 call and buying an August 60 call, that would be considered a calendar spread, correct? 

Dmitry Pargamanik 

Exactly, because you’re going across two different expirations, but the same strike and same option type. 

Jeff Praissman 

And what is the aim of a calendar spread, Dmitry? 

Dmitry Pargamanik 

The main aim of a calendar spread is an outlook based on time horizon. If you’re looking out over time and you’re expecting maybe volatility to increase or decrease, and you’re looking at the term structure—and using that term structure to structure a strategy based on your outlook of volatility—it could also be an outlook on perhaps a certain event you expect that will be covered by one option expiration versus another expiration that may not cover that event, or an expiration following that event, where you may think volatility will eventually increase or decrease. So the main outlook there is your volatility expectations over time—or over time horizon. 

Jeff Praissman 

And this kind of leads me into my next question—and I think you touched on it right there with the event. I was gonna ask you: what are some of the reasons an investor would use a calendar spread? Obviously, when we’re talking about events, it’s— a lot of times—earnings or news. 

Dmitry Pargamanik 

Exactly. It could be something like that where you’re expecting, for example—an earnings event. You could structure it two ways. You could structure it where you’re looking at the options available and, let’s say, the earnings is a month away or a little bit further. And based on your volatility expectations, you think that implied volatility is low on that option, and there’s a good chance that as you get closer to that earnings event, the implied volatility will increase. 

And let’s say that, since it’s far away and your expectations are—as we wait—there will be time decay, and we’re going to be in a short-term period in low volatility, and the stock is not gonna move that much. That could present an opportunity for a time spread, where you’re buying that option that you think the implied volatility is undervalued, and you’re selling an option in an expiration that will expire before that event, hoping to gain from selling that option due to decay in the premium—if that stock doesn’t move. So you’re spreading off that risk and financing some of your purchase of that longer-term option by selling the shorter term. 

Jeff Praissman 

And so obviously with the calendar spread, as you mentioned, you’re looking at different time horizons. Go back to when you mentioned that vertical spread’s probably the—I don’t wanna say simplest spread—but one of the most well-known. Obviously, with a vertical spread, directionally, it’s pretty straightforward, right? 
If it’s a call spread, I’m buying the lower strike, selling the higher strike—I’m bullish. And if I’m selling the lower strike and buying the higher strike—I’m bearish. 

But with a calendar spread, is it also useful for someone who wants to take a directional outlook? Or does that not really come into play with it? 

Dmitry Pargamanik 

Yes. So there’s somewhat of a directional bias in a calendar spread depending on how you structure it. And in the spread that I just described—where you’re owning a longer-term option versus a shorter-term option—you want the stock to float to the strike that you put this calendar spread on. 

You could put on a calendar spread at the money, you could put a calendar spread with out-of-the-money calls, in-the-money calls—but your sweet spot, as far as direction or where you want the stock to go on that expiration, is the strike. That strategy ceases to exist after that first option expires. Then you either have a call and that first option expired, or you have a call with the stock. 

But if you’re long the time spread, you want the stock to close at your strike at that first expiration, because the option that you sold is worthless, right? It goes to zero. So you keep all that credit that you sold it for. The option that you’re long at that strike—that’s where the time premium is the highest, right? So the time premium is always the highest at-the-money. 

So from that perspective, yes, direction would matter. Because you want it to go right to—or the closer it is to—that strike, the better. On the flip side, if you’re long the shorter-term option and the longer-term option, you want the stock to move as far away from the strike as possible. It’s almost like a long gamma play. 

So in this situation, let’s say the volatility is very high, and you expect that something will happen and the volatility will drop off over time. So in that scenario, you’re going to have that option in a shorter-term period where you’re expecting volatility to be sustained. You’re going to sell it, where you think afterwards the volatility will fall. But you want it to move away from that strike as much as possible. 

And the reason for it is that, when it moves far away, then those two options converge to par. Either the further it goes out-of-the-money, the closer they’re both to zero; the more they’re in-the-money, the closer it gets to one delta. And you want that to happen if you are short a calendar spread—meaning you’re owning the shorter-term option and shorting the longer-term option. 

Jeff Praissman 

And that sort of leads me into—when you’re analyzing these spreads and taking a look and screening for some opportunities—you had mentioned in-the-money, at-the-money. Are there certain strike areas you’re looking at? Are you looking at just at-the-monies? Are you looking at in-the-monies, deep in-the-monies, out-of-the-monies, way out-of-the-monies? What’s the sweet spot that gives you the most valuable information when you’re screening these? 

Dmitry Pargamanik 

Yeah, that’s a good question. And it depends on your outlook. You’re going to look at the strike based on where you think the stock will go from now to that first expiration. You could put on a bullish, for example, time spread. And let’s say you’re long the time spread, and you think the stock is gonna float up to a certain price—like you’ll think from now, two weeks from now, the stock will go up 2–3%. So you’ll want to look at the strikes that are 2 or 3% above the current spot price, being long the spread. If you think the stock will just sit here, you’ll do at-the-money. If you think the stock will drop from here and has a better chance of going down, you’re gonna pick a strike that is downside—or out-of-the-money puts or downside in-the-money calls. So it does depend on your outlook and your expectations. Those strikes do become important to the timeframe. If you’re looking at an out-of-the-money call, that’s different than an at-the-money call, because your expectations now are that the stock will float up to those strikes. 

Jeff Praissman 

Are there unique risks—or I guess, any risks—to a calendar spread? Just because, obviously, again going back to verticals: you’re in the same expiration, just different strikes. Here you’re throwing a completely different variable in there, right? You’re at two different time horizons. 
So whether it’s July–August, like we talked about before, July–September, July–January—whatever. Are there risks associated with a calendar spread that maybe are not associated with other spreads that are in the same expiration? 

Dmitry Pargamanik 

Yeah, definitely. There’s always that early exercise/assignment risk, where you have a calendar spread and if it’s something deep in-the-money and you’re short one, it could get exercised, you get assigned, and then it becomes a different strategy. Because now, instead of an option, you have a stock. 

Calendar spreads also have decay risk, Vega risk, and different Greeks that you have to pay attention to—and even the Rho risk, where you have potential differences in expectations of interest rates or dividends, cost of carry. So those could also come into play. 

But Vega is an important one because the implied volatility—even though you have one implied volatility in one expiration, and a different implied volatility in another—the Vegas of those implied volatilities are different too. 

So an implied volatility move in a short-term expiration—in Vega terms—is not the same as a one-point implied volatility move in a longer-term expiration. The longer terms will have higher Vega. 

And just to give you an example: it’s very possible that an option that’s a month away, if the implied volatility moves up or down—say one click—that would translate to 20 cents in value in the option because of the Vega. 

In a shorter term—let’s say an option was a week away—for that option to change by 20 cents, it could take 10 or 20 implied volatility clicks. When people look at those spreads, just because you’re expecting one vol click to change here, doesn’t translate in dollar terms to the same thing as one vol click in a different expiration. So you do have a Vega risk there—you should be aware of it. 

Jeff Praissman 

And we talked about what strikes you kind of look at. What else are you looking at when you’re screening for these spreads? 

Dmitry Pargamanik 

Yeah, the strikes for sure. But the main difference is that time horizon—your expectations. And when you’re doing it, you usually have some kind of outlook for longer-term implied volatility versus shorter term. And when you’re looking at it, you have to make sure that if your expectations are that something will happen—let’s say out in time—that you are choosing expirations that will cover that event. 

And if you think that we’re not going to be impacted for the next two or three weeks, you want to make sure that you’re using options that are aligned with that type of outlook. So the major part is that time horizon. 

You could look at history, for example, and map out what a slope usually looks like in a horizontal skew over time. You could look at it in periods where there are no expectations of anything happening or nothing on the horizon. You could look at periods of very high volatility. Look at periods of low volatility. To make comparisons. But the big thing is that horizontal skew—the difference in those expirations. 

Jeff Praissman 

And you also touched on events. Obviously, I would assume different volatilities in different months—that the first thing I go to is: okay, maybe it’s earnings or, again going back to like an FDA drug ruling for those types of stocks. 

Dmitry Pargamanik 

Yeah. 

Jeff Praissman 

Anything else that volatility could signal in different months? Or is that really just more event-driven, do you think? 

Dmitry Pargamanik 

Yeah, it could be. Some of it is event-driven—that will reflect in a horizontal skew. If you’re looking at a situation where there’s no obvious expectations or known events, and you see something where the horizontal skew is much different from where we normally see it—because, let’s just say, in the markets, horizontal skew usually slopes up. Because as you go further and further out in time, there’s more and more uncertainty—something could happen, right? 

In the shorter-term period, we have more information. We know more because we know the earnings cycle, we know when the Fed meets, we have all this data to analyze. But as you go out further in time, there’s less certainty with earnings, there’s less certainty with something happening. And just like anything: more time, more things could happen. 

If we see that it gets inverted and we don’t know why, the market could be signaling something. Something out there is making it nervous. Something out there is saying there’s going to be less liquidity or more danger. 

So the term structure can potentially signal things—especially if the curvature starts to look out of line with usual expectations, if it’s outside that range we usually expect it to trade in. 

Jeff Praissman 

Dmitry, this has been great. Any final thoughts you’d like to leave our listeners with? 

Dmitry Pargamanik 

Yeah. As far as calendar spreads, I think that for traders, investors, and people looking at options, it’s valuable to consider—especially when you have a certain outlook and you know that you could use this type of strategy. 

And even if you’re looking at it from the perspective of market indications, indicators, or signals—it’s important just to understand it and keep an eye out, because it could give you important information you wouldn’t see somewhere else. Options are forward-looking, and if you’re paying attention to market signals and indications, just following that could be an important feature in your trading. 

Jeff Praissman 

This was great. And I really look forward to our monthly podcast. 

For our listeners, you can find more of Dmitry every morning on YouTube—their own channel. Also, go to our website, ibkr.com. Go to Education, under Webinars, you can see upcoming webinars as well as ones they’ve already aired. 

Go to our contributors, search for Market Chameleon. And of course, our podcast is available on Spotify, Amazon Music, Apple Music, and all the other usual sources—as well as our website. 

Dmitry Pargamanik 

Thanks, Jeff.