Option writing before the Budget: Why calendars beat naked shorts

In a calendar spread, you buy a longer-term expiry option and sell a nearer-term option with the same strike price and same option type

• Option writing in January is risky due to rising volatility before the budget
• Calendar spreads help reduce risk and margin requirements for option writers
• Strategy works best when near-term IV is higher than long-term IV

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Option writing in January is a trap. Options turn expensive before the budget, and this kills option writers. This time it's especially dangerous. Since August 2025, VIX and IV or Implied Volatility (the barometers of perceived risk and option expensiveness) have been at lower levels. That makes option writing riskier than it looks. So what should you do? How do you navigate this tricky scenario? Let's unpack this step by step.

Let's understand the risk for you as an option writer in detail.

Writing options when India VIX and IV are at lower levels means you're selling cheap options. If perceived risk increases (VIX and IV rise), those same options become expensive. Example: An ATM Nifty option might trade at Rs 200 when options are cheap. The same option can jump to Rs 300 or Rs 350 if perceived risk increases, even if Nifty stays flat. This is a P&L killer for you as an option writer.

Why does this happen in January? The budget. Participants expect big directional moves from possible policy changes. Perceived risk rises. Options get expensive.

What's the solution for you? Calendar spreads.

What is a Calendar Spread?

In a calendar spread, you buy a longer-term expiry option and sell a nearer-term option with the same strike price and same option type. This is called buying a calendar spread. The option you buy will always be costlier than the option you sell. You pay net premium upfront, hence the name Buy Calendar Spread. Example: Buy 26,000 Feb Call, Sell 26,000 Jan Call.

How does Buy Calendar Spread help?

First, you have protection against rising volatility. You bought an option against the one you sold. If perceived risk rises and options become expensive, you're covered. Any rise in premiums affects all options of the same index or stock almost equally. This reduces the impact of rising premiums significantly for your overall position.

Second, margins are lower compared to naked option writing. You're buying one option against selling another, so the margin requirement drops substantially. But here's the real advantage: the sold option is closer to expiry, so its premium erodes quicker than the bought option. This time-based erosion works in your favor.

Third, you have limited and defined risk. Imagine a slow-moving market suddenly gaps up or down overnight. This would devastate naked option writers with unlimited loss potential. With calendar spreads, the most you can lose is the net premium paid upfront.

Key Points to Remember:

IV describes the perceived risk we've discussed throughout this article. IV for an option is now publicly available information on most trading platforms. You're better off trading in options where nearer-term option IV is higher than longer-term expiry option IV. This spread in IV levels is what makes the strategy profitable.

This strategy delivers better returns closer to expiry, so it's best suited for weekly expiries rather than monthly ones.

Thus, to continue writing options with reduced risk in January before the budget, Calendar Spreads are your better option.

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