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Put Calendar

Put Calendar
TradingStrategy and EducationOptions and Derivatives TradingOptions and DerivativesOptions Trading Strategy and Education

What Is a Put Calendar?

A put calendar is an options strategy that includes selling a close term put contract and buying a second put with a longer-dated expiration. For instance, an investor might buy a put option with 90 days or more until expiration, and all the while sell a put option with a similar strike price that has 45 days or less until expiration.

Figuring out a Put Calendar

A put calendar is used when the short-term outlook is neutral or bullish, however the longer-term outlook is bearish. To profit, an investor needs the underlying price to trade sideways or higher throughout the time staying on the put that was sold, then fall before the time staying on the put that was bought terminates. The put calendar requires paying a premium to begin the position, given that the two options contracts have a similar strike price.

The put calendar exploits time decay. That is, since the options have a similar strike price, there is no intrinsic value to capture. In this way, while hoping to exploit time value, the major risk is that the option gets deep in-or out-of-the-cash, wherein case, the time value rapidly vanishes.

A variation of the put calendar includes rolling the strategy forward by [writing another short-term option](/composing an-option) contract when the previous one lapses and afterward continuing that until the underlying moves fundamentally or the long-term option terminates.

During the life of the close term option, the potential profit is limited to the degree that the close term option declines in value more rapidly than the longer-term option. When the close term option has expired, in any case, the strategy turns out to be just a long put whose potential profit is substantial. The potential loss is limited to the premium paid to start the position.

An increase in implied volatility (IV), any remaining things being equivalent, would decidedly affect this strategy. As a general rule, longer-term options have a greater sensitivity to changes in market volatility, i.e., a higher vega. Know, notwithstanding, that the all over term options could and presumably will trade at various implied volatility levels.

Put Calendar Example

An illustration of a put calendar includes buying a 60-day put contract with a strike price of $100 for $3 and selling a 30-day put with a similar strike for $2. The maximum gain would be the strike price less the net premium paid, or $99, which is $100 - ($3 - $2). The maximum loss is the net premium paid, which is $1, or $3 - $2.

The max gain happens when the stock trades at the very strike price on expiration at the date of the close term option. That option lapses worthless and the investor is left with the long put. If the stock falls to zero before the next expiration, the investor might in any case sell that stock for $100 — less the $1 paid for the options — and the max gain of $99 is realized.

The max loss occurs assuming the stock price either rises so the two options lapse worthless or the options fall such a lot of that they trade at their intrinsic value. The loss there is the net premium paid.

Features

  • A put calendar is best utilized when the short-term outlook is neutral or bullish.
  • This strategy exploits time decay, with increased implied volatility being a positive outcome.
  • A put calendar is an options strategy selling a close term put and buying a second put with a longer-dated expiration.