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Shubham Agarwal: Calendar Spreads Offer Solution Amidst Low Volatility & Limited Premiums
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Moneycontrol•21-09-2026, 10:57
Shubham Agarwal: Calendar Spreads Offer Solution Amidst Low Volatility & Limited Premiums
- •Option writing is attractive due to probability favoring sellers and time decay, but rewards are limited, and sharp market moves can cause significant losses, especially with low implied volatility (IV).
- •Low IV means cheap options, leading to small premiums for sellers despite substantial risk; a sudden rise in volatility can quickly increase option prices and lead to losses.
- •The calendar spread strategy addresses low premiums by using two options with the same strike and type but different expiration dates, buying the later expiry and selling the nearer expiry.
- •Key features include reduced margin requirements, benefiting from faster time decay of the nearer-term option, and protection from rising IV due to the long option.
- •While not a guaranteed solution, calendar spreads limit maximum loss to the net premium paid and are often more attractive when the nearer expiry has higher IV than the later expiry, offering a controlled alternative for option writers during low-volatility periods.
Key Questions Answered
A calendar spread uses two options with the same strike price and type, but different expiration dates. In a long calendar spread, the trader buys the longer-dated option and sells the nearer-term option, helping manage time decay and limit risk during low-volatility periods.
Low implied volatility means options are cheap, so sellers accept small premiums while taking on substantial risk. If volatility suddenly rises, option prices expand and positions can lose money quickly.
The long-dated option partly offsets the short-term option, which reduces the margin requirement compared to an uncovered sale. Additionally, the long option provides protection if perceived risk and implied volatility increase.
