How do calendar spreads serve as hedging instruments?

How to answer

Calendar spreads (time spreads) involve buying and selling options on the same underlying and strike but different expiration dates. Buying a calendar spread (long the far-dated option, short the near-dated) profits from time decay of the near-dated option and/or changes in the volatility term structure. As a hedge, calendar spreads are used to: monetize the difference between near-term and long-term implied volatility (selling expensive near-term vol around events like earnings while maintaining longer-term protection), reduce the cost of protective options (selling near-dated to offset cost of far-dated), and express views on term structure. For example, before an earnings event with elevated near-term IV, a PM might sell a 1-week put and buy a 1-month put — if earnings are benign, the near-term put expires worthless while the far-dated put retains value as ongoing protection.

Key idea: Buy long-dated, sell short-dated — trade time decay and vol term structure.