Calendar & diagonal spreads
What happens to a Calendar spread if the underlying asset undergoes a massive directional gap move?
By Easy Money Scanner · Educational reference · Not investment advice
The short answer
A large directional gap can push the underlying far from the calendar's strike, causing both options to move deep in- or out-of-the-money, which typically reduces the spread's value and can result in a loss near the full debit paid.
How it works
Because calendar spreads rely on the underlying staying near the strike, a sudden gap undermines the theta-decay advantage, as both legs then behave more like simple directional options with reduced spread differential.
An example
If a stock gaps from $100 to $115 overnight on news, a 100-strike calendar spread will likely lose a significant portion of its value as both options move deep in-the-money.
Risk & limitations
Gap risk is a primary threat to calendar spreads and cannot be fully hedged by strike or expiration selection alone; earnings and major news dates increase this risk substantially.
Examples are hypothetical, not trade recommendations. US contract and regulatory references do not automatically apply in Canada. Rules, margin requirements and broker policies can change; confirm them with the relevant authority and your broker.