Calendars and Diagonals
Selling near-dated convexity to fund longer-dated convexity, and the term-structure bet behind it
The week before any liquid stock's earnings announcement, two implied volatilities on the same strike of that stock often diverge sharply: the front-month IV (which contains the binary earnings event) prices substantially higher than the back-month IV (which contains the same event but spread across a longer horizon). For a typical large-cap name reporting earnings 5 days before front-month expiration, the front-month at-the-money IV might be 65% while the second-month at-the-money IV is 35% — a 30-vol-point difference between two contracts on the same underlying at the same strike. This is the structural setup for a calendar spread that is approximately Delta-neutral on entry, has positive Theta (the front-month decays faster than the back-month), has positive vega (the long back-month dominates), and is a clean expression of the trader's view that the front-month IV is overpricing the earnings event relative to the back-month.
That is the opening. Finishing a lesson is where it stops being interesting and starts being useful: the full lesson runs to 9 sections and ends with 6 practice questions. A free account is what opens the rest, and the other 255 lessons in the Academy with it. No card.
What this lesson covers
- 1The term-structure bet — what a calendar actually expresses
- 2Why earnings calendars are the most-popular calendar trade
- 3Calendar Spread Builder
- 4Calendar spread Greeks and the math of the structural bet
- 5Calendar spread Greek profile — long 200C 60d / short 200C 30d ($200 stock, 30% IV, 4.5% rate)
- 6Calendar P&L scenarios after 5 days holding (entry $3.20 debit per share)
- 7Earnings calendars on liquid mega-caps — the systematic pattern that produces the most-traded calendar opportunities
- 8Where to see this on the platform
- 9Summary