The Reverse Calendar Spread Strategy, also known as a reverse time spread, is an advanced options strategy designed to profit from sharp price movements and/or a decline in implied volatility in the short term. Unlike a regular calendar spread (which profits from time decay and rising volatility), this strategy thrives when the underlying moves quickly, and the front-month options lose value faster than the back-month options.

It is ideal for event-driven trades, such as major news releases, earnings reports, central bank decisions, or volatility crushes.

What Is a Reverse Calendar Spread?

A reverse calendar spread involves:

• Selling a longer-term option (back-month)
• Buying a shorter-term option (front-month)
• Both options are typically at the same strike price

This creates a position that is short vega (benefits from falling implied volatility) and long gamma (benefits from sharp price movements).

Payoff Profile:

• Loses money if price stagnates near the strike
• Profits if price moves significantly up or down from the strike
• Profits further if implied volatility drops, especially in the long-dated option

Strategy Objective

• Exploit a short-term breakout or strong move in the underlying
• Capitalise on IV crush (e.g. post-earnings, after economic releases)
• Trade volatility mispricing across expirations

Setup Example

Underlying: EUR/USD
Strike: 1.0900
Buy: 1-week 1.0900 Call
Sell: 1-month 1.0900 Call
Net Debit: Typically a credit or low-cost debit, depending on IV skew

Ideal Conditions for Use

• High implied volatility in longer-term options
• Anticipation of short-term price breakout (not just volatility event)
• Expectation of implied volatility collapse post-event
• Short-term option expires soon after the expected move

How the Strategy Works

1. Entry Timing

• Enter before a major event, such as FOMC, ECB, NFP, earnings, CPI
• Choose a front-month option expiring shortly after the event
• Choose a back-month option with higher implied volatility

2. Price Movement Scenarios

• Large move away from strike = front-month gains intrinsic value fast
• IV crush post-event = short back-month loses value
• Net position becomes profitable as short option decays faster than expected

3. Stagnant Price

• If the underlying stays near strike, both options lose value
• Since the trader is short the higher vega option, losses can occur
• Time decay favours the front-month, but not enough to offset directional stagnation

Profit and Loss Dynamics

• Maximum Profit: When the underlying moves far from the strike quickly
• Maximum Loss: When price remains near the strike until front-month expires
• Breakeven Zones: Typically exist well above and below the strike

Risk Management Tips

• Trade after IV has expanded, not when it’s low
• Always define risk using small position sizing
• Close early if price spikes or volatility collapses favourably
• Monitor theta and vega to understand time/volatility sensitivity

Real-World Example: NAS100 Before FOMC

• NAS100 trading at 17,500
• Buy 2-day 17,500 Call
• Sell 14-day 17,500 Call
• Expectation: large FOMC reaction + implied volatility drop post-announcement
• Outcome: price jumps to 17,850, front option gains intrinsic, back-month IV collapses
• Result: strategy closes with strong profit

Advantages of Reverse Calendar Spreads

• Profits from movement in either direction
• Takes advantage of IV crush post-event
• Limited risk (debit) or low-cost setup
• Excellent for event-based trading

Risks and Drawbacks

• Maximum loss occurs when price doesn’t move
• Short back-month option carries vega risk
• Requires accurate timing of both volatility and direction
• Not ideal in low-volatility, sideways markets

Conclusion

The Reverse Calendar Spread Strategy is a precision tool for trading around high-impact market events. Unlike standard calendars, it’s designed for explosive price action and collapsing implied volatility, offering a structured, limited-risk way to profit when markets make fast decisions.

To master reverse calendars and integrate them into a full volatility and event-driven strategy, enrol in our elite Trading Courses and learn how to trade volatility like a professional.