A calendar spread (also called a time spread or horizontal spread) is an options strategy that involves selling a near-term option and buying a far-term option at the same strike price. The strategy profits from the difference in time decay (theta) between the two options, as the near-term option loses value faster than the far-term option.

The net debit is the cost of entering the trade, calculated as the far-term premium minus the near-term premium. This net debit represents the maximum loss on the trade, which occurs if the underlying stock moves far away from the strike price by the near-term expiration, causing both options to lose most of their value.

The ideal scenario for a calendar spread is that the stock stays near the strike price at the near-term expiration. At that point, the near-term option expires worthless (you keep the full premium collected), and the far-term option retains significant time value that you can sell or continue to hold. The estimated max profit depends on the remaining time value of the far-term option at near-term expiration.

Formulas

Net Debit = Far-Term Premium - Near-Term Premium

Max Loss = Net Debit × 100 × Contracts

Estimated Max Profit = (Remaining Far-Term Value + Near-Term Premium - Net Debit) × 100 × Contracts

Example

You sell a near-term call at the $100 strike for $2.00 and buy a far-term call at the same $100 strike for $4.50 on 1 contract. The net debit is $4.50 - $2.00 = $2.50. Max loss is $2.50 × 100 = $250. If the stock stays at $100 at near-term expiration, the near-term call expires worthless and the far-term call retains time value, generating a profit.