A Calendar spread is an options or futures spread established by simultaneously entering a long and short position on the same underlying asset but with different delivery months. The neutral calendar spread strategy involves 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.
The options trader applying this strategy is neutral towards the underlying for the short term and is selling the near month calls to profit from their rapid time decay.
Limited Profit Potential
The maximum possible profit for the neutral calendar spread is limited to the premiums collected from the sale of the near month options minus any time decay of the longer term options. This happens if the underlying stock price remains unchanged on expiration of the near month options.
Limited Downside Risk
The maximum possible loss for the neutral calendar spread is limited to the initial debit taken to put on the spread. It occurs when the stock price goes down and stays down until expiration of the longer term options.
