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Relative value
Why can a calendar spread ignore whether the market is rising or falling?
Calendar spread
What it bets
The spread between the near month and the far month of the same underlying corrects relative to its own normal level. The two months rising and falling together in absolute price are not the main exposure.
How the rule is written
Buy one expiry and sell the other, with the quantities lined up to the contract size. When the spread is above its normal level, sell the spread. When it is below, buy the spread, or hold with the shape of the roll. Profit and loss come from which month rises more, not from whether the underlying itself rises or falls.
When it fails
When the near month is squeezed, the spread can go to an extreme before expiry. Direction was hedged. Expiry and liquidity were not.
Do not confuse it with
One leg of a spot-futures basis is spot. Both legs of a calendar spread are futures. The two legs of a pair are different underlyings.