The calendar spread is a trade betting that IV in one month is mispriced against another. While many view calendars as long or short implied volatility trades, in actuality, calendars are a play on the exact opposite. A calendar spread is a play on movement. Compare the long calendar to a short straddle. Figure 11.1 shows a risk chart of a short straddle for the SPX, whereas Figure 11.2 shows a calendar spread for the SPX under the same conditions.
Figure 11.1: A short straddle for SPX.
The only difference between the two is that there is a limit to how much a calendar can lose. On the surface, though, calendar spreads ...
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