Calendar spread
Also written Calendar spread (futures)
A long position in futures of one maturity and a short position in futures of another maturity on the same underlying. It is a bet on the price gap between the two months, not on market direction.
In plain language
A naked futures position is a bet on direction. If you are long and the market falls, you lose.
A calendar spread takes two opposite positions on the same underlying: long one maturity and short a different maturity. The workbook's example is a short position in the near month contract with a long position in the far month contract. If the whole market rises or falls, one leg gains roughly what the other loses. What is left is the difference between the two futures prices, called the spread.
The workbook gives it three names. A spread in two contracts with different maturities on the same product "is known as calendar spread/time spread or horizontal spread". In Chapter 5 it uses the same names for an options strategy: a horizontal spread uses options of the same type and strike but different expiries, "also known as time spread or calendar spread". It is the same idea in both places, different expiries on the same underlying, applied to futures in one case and to options in the other. The options version has its own page, horizontal spread.
Because the two legs offset each other, the workbook says spread positions are hedged to a large extent and are treated as conservatively speculative positions.
How it works
Counting spreads (Chapter 3). A calendar spread is always computed with respect to the near month series. It is always named by its months, for example the August–September spread or the August–October spread. The workbook's case is Mr. A:
| Contract | Position |
|---|---|
| One-month futures | Short 3 |
| Two-months futures | Long 2 |
| Three-months futures | Long 3 |
That gives 2 calendar spreads between the first and second months and 1 between the first and third months. The remaining 2 three-months contracts are naked.
When a spread stops being a spread. A calendar spread becomes a naked/open position when the near month contract expires or either leg is closed. In the equity derivatives segment, only calendar spreads are available for trading. Inter-commodity spreads, such as gold and silver, are a commodity segment feature.
As an arbitrage (Chapter 5, section 5.1). The arbitrageur works out the fair price of each contract using the cost of carry, compares it with the traded price, then buys the underpriced contract and sells the overpriced one. The profit comes when the actual spread returns to the fair spread and both positions are unwound. The workbook's own numbers are in the example below. It calls calendar spreads low risk, low return: there is no directional bet, and the opposite positions protect against large losses whether the stock rises or falls.
Why it rarely works in practice. Index and stock futures are liquid, so mispricing is spotted quickly and disappears within a very short time. Both legs must be entered at the same moment and squared up at the same moment. Any delay in executing the second leg cuts the profit and can turn it into a loss.
Margin (Chapter 7, section 7.10). Calendar spread positions receive margin offsets, called the calendar spread benefit or calendar spread treatment. SEBI has cut this back on expiry days:
| Contracts | Rule | From |
|---|---|---|
| Equity index derivatives | Contracts expiring on the same day no longer receive margin offsets | February 1, 2025 |
| Single stock derivatives | No calendar spread treatment on expiry day for a spread whose near leg expires that day. Spreads between later expiries keep the benefit | May 05, 2026 (SEBI circular dated February 05, 2026) |
The formula
Fair futures price F = S x e^(r x t)
Fair spread = F(far month) - F(near month)
Actual spread < fair spread -> near month overpriced: short near, long far
Actual spread > fair spread -> far month overpriced: long near, short far
Net result = Gain on one leg - Loss on the other leg
A worked example
The workbook's calendar spread (Chapter 5). A stock trades at Rs 120. The near-month future is at Rs 121.30 and the mid-month future is at Rs 121.50. The interest rate is about 8% a year.
Fair near-month price 120 x e^(0.08 x 1/12) = Rs 120.80
Fair mid-month price 120 x e^(0.08 x 2/12) = Rs 121.61
Fair spread = about 81 paise
Actual spread 121.50 - 121.30 = 20 paise
The actual spread is too narrow, so the near month is overpriced compared with the mid month. Short the near month at 121.30 and go long the mid month at 121.50.
Case 1: stock closes at 122 on near-month expiry, mid-month at 122.82
Loss on near-month short 121.30 - 122.00 = -0.70
Gain on mid-month long 122.82 - 121.50 = +1.32
Net gain Rs 0.62 a share
Case 2: stock closes at 120, mid-month at 120.80
Gain on near-month short 121.30 - 120.00 = +1.30
Loss on mid-month long 121.50 - 120.80 = -0.70
Net gain Rs 0.60 a share
The stock went up in one case and down in the other, and the spread made about 60 paise both times. That is what "no directional bet" means.
In rupees (illustrative lot of 500 shares, since lot sizes are set by the exchange):
Case 1 0.62 x 500 = Rs 310
Case 2 0.60 x 500 = Rs 300
Naked near-month short alone, Case 1 -0.70 x 500 = -Rs 350
The profit is small, which is why the workbook calls it low return. If the near month expires and the long mid-month leg is still open, the position is naked, and every rupee the stock moves after that is gained or lost in full.
Expiry day and margin (the workbook's illustration). Suppose monthly single stock expiries fall on the 29th (current month), 30th (next month) and 31st (far month). On the 29th, spreads between the 29th and 30th contracts, or between the 29th and 31st, get no calendar spread treatment. A spread between the 30th and 31st contracts still does.
Why NISM asks about it
Chapter 3, section 3.4, defines naked and calendar spread positions. Section 3.9 calls them calendar spread, time spread or horizontal spread, explains the near-month counting rule and when a spread becomes naked. Two Chapter 3 sample questions follow from this. One asks whether a calendar spread in index futures attracts the same, lower, higher or no margin compared with two separate legs. The workbook describes margin offsets for spreads, which points to lower. The other asks whether the far leg becomes a regular open position when the near leg expires. Chapter 5, section 5.1, works through calendar spread arbitrage with the Rs 120 stock. Section 5.2 uses "calendar spread" as another name for the horizontal options spread, and a Chapter 5 sample question offers it as a wrong answer for a bull call spread. Chapter 7, section 7.10, records the expiry-day removal of calendar spread margin benefits.
Common exam traps
- Same underlying, different maturities. Different underlyings with the same maturity make an inter-commodity (inter-product) spread, not a calendar spread.
- One name, two instruments. In VIII, "calendar spread" means both the futures spread (sections 3.9 and 5.1) and the options horizontal spread (section 5.2, "also known as time spread or calendar spread"). Work out from the question which instrument it means.
- Count from the near month. Far-month contracts left over after pairing are naked.
- It becomes naked when the near month expires or either leg is closed. It does not wait for the far month to expire.
- Only calendar spreads trade in the equity derivatives segment. Inter-commodity spreads are found in commodities.
- Low risk does not mean no risk. If one leg is executed late, the profit shrinks and can turn into a loss.
- No directional bet. In the workbook's example the spread earns Rs 0.62 when the stock rises and Rs 0.60 when it falls.
- The margin benefit is lost on expiry day. For index derivatives this applies from February 1, 2025. For single stock derivatives it applies from May 05, 2026, and only to spreads whose near leg expires that day. The March 2026 workbook says the stock rule "will be effective" from that date, which has now passed, so it is in force.
Where this is taught
Free preparation for NISM Series V-DRelated terms
- Calendar spread chargeThe reduced margin on offsetting positions in the same underlying across different expiries: 1.75% of the far-month contract for index derivatives, 2.2% for single stock derivatives.
- Calendar spread tradingTaking opposite positions in two maturities of the same currency futures (or options) contract to trade the change in the spread between them, rather than the direction of the currency.
- ArbitrageSimultaneously buying and selling an asset, or a replica of it, in different markets to profit from a price discrepancy — a trade that aims to lock in a profit rather than bet on direction.
- Futures contractA standardised forward traded on an exchange, where the exchange fixes every term except the price and the clearing corporation guarantees settlement, so neither side carries the other's default risk.
- Horizontal spreadTwo options of the same type and the same strike but different expiries — a position whose entire value is the difference between the two legs' time values, not a view on direction.
- Contract cycleThe period over which a derivative contract trades, and the set of expiries available at once — for NSE stock and index futures, a three-month cycle of near, next and far months.
- Cost of carryThe cost of holding an asset until a future date — financing interest plus storage, less any income it pays. It links spot to futures: fair futures price = spot + cost of carry − inflows.
- Naked positionA long or short position in a futures contract held without any position in the underlying asset or an offsetting contract — fully exposed to price moves in one direction.
- Intra-commodity spreadA long futures position in one contract month and a short position in another month (or a different lot size) of the same commodity, taken to profit from a change in the gap between them.
- Vertical spreadTwo options of the same type and the same expiry but different strikes, one bought and one sold — a limited-profit, limited-loss position that trades away part of the upside to cut the cost or cap the risk.
- RolloverCarrying a derivatives position past expiry by closing the expiring contract and opening the same position in the next series simultaneously — the only way to hold a view longer than one contract cycle.
- Futures bull spreadAn intra-commodity futures spread taken when the actual gap between two calendar months is wider than the fundamental average difference — buy the near month, sell the far month, and wait for the gap to narrow.
- Futures bear spreadAn intra-commodity futures spread taken when the actual gap between two calendar months is narrower than the fundamental average difference — sell the near month, buy the far month, and wait for the gap to widen.