Diagonal Calendar Spread Option Strategy Butterfly

Diagonal calendar spread option strategy butterfly

A Long Calendar Spread is a low-risk, directionally neutral strategy that profits from the passage of time and/or an increase in implied volatility.

Diagonal calendar spread option strategy butterfly

Directional Assumption: Neutral

Setup: A calendar is comprised of a short option (call or put) in a near-term expiration cycle, and a long option (call or put) in a longer-term expiration cycle. Both options are of the same type and use the same strike price.

- Sell near-term Put/Call
- Buy longer-term Put/Call

Ideal Implied Volatility Environment : Low

Max Profit: The maximum profit potential of a Calendar Spread can’t be calculated due to both options being in different expiration cycles.

One of the most positive outcomes for a Calendar Spread is for the trade to double in price.

Diagonal calendar spread option strategy butterfly

How to Calculate Breakeven(s):The break-even for a calendar spread cannot be calculated due to the different expiration cycles being used. A guideline we use is within 1 strike of the Calendar Spread’s strike price.

tastytrade approach:

There are two things to remember when it comes to calendar spreads:


Diagonal calendar spread option strategy butterfly

If the stock price moves too far from our strikes, the trade will become a loser.
2. An implied volatility increase will help our trade make money.

Keeping this information in mind is most helpful when setting up the trade. We pick strikes that are near the stock price, if not right on the stock price.

Diagonal calendar spread option strategy butterfly

We may skew it slightly bullish or slightly bearish if we have a small directional assumption, but it will be very close to the stock price regardless - that gives us the most exposure to profit or loss with changes in implied volatility.

You will only see us routing this strategy in the lowest of IV environments.


When do we close Calendar Spreads?
Since a calendar spread can be hurt by too much stock movement, we tend to manage our winners at around 25% of the debit we paid to enter the trade. Waiting too long for additional profits could mean stock price movement, which is bad for the position.

Ultimate Guide To Trading Call Diagonal Spreads

We never route calendar spreads in volatility instruments. Each expiration acts as its own underlying, so our max loss is not defined.

When do we manage Calendar Spreads?
Since this is a debit spread that is defined risk, we don’t usually manage these spreads.

Diagonal calendar spread option strategy butterfly

We are comfortable with the debit paid as max loss, and there’s not much we can do with these spreads regardless since they share the same strike.