Option Prices and Expiration Dates: Diagonal Spreads and Time Value

Do option prices and expiration dates move together? The answer is no. An option contract’s expiration date is typically fixed when the contract is created and does not change automatically with the market price. What continuously decreases is the time remaining until expiration. Option prices are influenced by the underlying asset price, time value, implied volatility, and other factors. Diagonal spreads combine options with different strike prices and expiration dates to manage directional exposure, time decay, and volatility risk.

Do Option Prices and Expiration Dates Move Together?

No.

Once an option contract is created, its expiration date is typically fixed. For example, an option expiring in October does not automatically become a November option simply because the underlying asset price rises. What changes over time is the amount of time remaining until expiration.

From a basic options pricing perspective, an option premium can be viewed as a combination of intrinsic value and time value. As the remaining time decreases, an option’s time value generally decays. This sensitivity is commonly measured by Theta.

However, this does not mean an option must lose value every day. A significant move in the underlying asset or an increase in implied volatility (IV) can offset the effect of time decay.

What Is a Diagonal Spread Strategy?

A diagonal spread is an options strategy that combines two positions of the same option type with different strike prices and different expiration dates.

It shares characteristics with both calendar spreads and vertical spreads:

• Calendar spreads mainly differ by expiration date;

• Vertical spreads mainly differ by strike price;

• Diagonal spreads differ by both strike price and expiration date.

One common bullish structure involves holding a longer-dated call option while selling a shorter-dated call option with a different strike price.

The goal is not to guarantee premium income from the short-dated option, but to construct a risk-return profile using the different Theta, Delta, and Vega exposures of the two contracts.

Short-Dated Options vs. Long-Dated Options

Time decay does not affect all options equally. In general, options that are closer to expiration—especially those near the money—may experience more noticeable changes in time value, while longer-dated options retain more time value. This difference in maturity is one of the reasons diagonal spreads can behave differently across time horizons.

However, the strategy is also influenced by the direction of the underlying asset and changes in implied volatility. If the underlying price moves quickly beyond the short option’s strike price, the trader may face assignment risk, the need to roll the position, or a significant change in portfolio Delta. If implied volatility declines, the value of the longer-dated option may also fall.

For this reason, a diagonal spread should not be viewed as a simple time-decay arbitrage strategy.

FAQ

• Does an option’s expiration date change automatically when the market price moves?
  No. The expiration date of an individual option contract is typically fixed. What changes is the remaining time until expiration and the option’s market price.

• Do options always become cheaper as expiration approaches?
  Not necessarily. Time value generally decreases, but changes in the underlying asset price or implied volatility can still cause an option’s price to rise.

• What is the difference between a diagonal spread and a calendar spread?
  A calendar spread typically uses the same strike price with different expiration dates, while a diagonal spread uses both different strike prices and different expiration dates.

• Is a diagonal spread mainly a Theta strategy?
  Not entirely. Theta is important, but Delta, Vega, movements in the underlying asset, and assignment risk can also have a significant impact on the final outcome.

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