Using calls, the calendar spread strategy can be setup by buying long term calls and simultaneously writing an equal number of near-month at-the-money or slightly out-of-the-money calls of the same underlying security with the same strike price
Calendar spreads, also known as time spreads, are extremely versatile strategies and can be used to take advantage of a number of scenarios while minimizing risk. A calendar spread consists of buying or selling a call or put of one expiration and doing the opposite in a later expiration. More often than not, this involves buying or selling an option in the front month (the expiration closest to the current date) and selling or buying an option of the same strike either the next month or a few months out. They can also be done using weeklies instead, especially around events. Call or put calendar spreads look alike on a graph of profit and loss.
Bull Calendar Spread
If the options trader is bullish for the long term and is selling the near month calls with the intention to ride the long call for free, he is implementing the bull calendar spread strategy.
Neutral Calendar Spread
If the options trader is neutral on the underlying security and is selling the near month calls primarily to earn from time decay, then he is implementing the neutral calendar spread strategy.
Put Calendar Spread
The calendar spread can also be implemented using put options.
Reasons to put on a calendar spread
In a long calendar spread you are short gamma, positive theta and long vega . Therefore, you want the stock to stay still and the implied volatility to go up. Does that sound unlikely? It need not necessarily be so, but the calendar spread does require some refined thought about what your expectations are for an underlying.
At-the-money front month options decay the most as expiration approaches. If stock stays still the long calendar spread allows a trader to benefit from that decay (as he or she is short the front month option) without being naked short an option