Calendar spread (horizontal, or time spread) is the option strategy with limited risk and profit, which lies in the simultaneous buying and selling one kind of options (calls and puts) with the same strike price.
For calls: buying the call, which has more distant expiration date called «back-month» and selling another call with closer expiration date called «front-month».
For puts: buying the put, which has a long-term expiration date, that is «back-month» and selling another put with short-term one called «front-month».
This strategy is rather conservative since it implies price movement first in one direction, then in another and due to the great opportunities in the selection of options prices it’s possible to benefit from the underlying asset movements in any direction. When running time spread, an investor is looking forward to the stock to be around the strike price when the short-term contract is exercised.
In case of sharp market movements, the calendar spread leads to a negative result, but the use of this strategy is justified since it provides a considerable risk-reward ratio.
Suppose, someone uses calendar spread by buying the Call 90, September 2017 and selling the Call 90, August 2017. If the price falls to $85 in August and then rises to the level of $95 in September, it generates profit for the long-term option and receiving a premium from the short-term one.