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A Calendar Put is a "neutral" option strategy, meaning a strategy that can gain from a stock that does NOT rise or fall.

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Strategy: Calendar Put, ATM

a.k.a. Horizontal Spread, Time Spread

Calendar Put At the Money Option Graph

The Outlook: Neutral on stock price movement, and Implied Volatility currently low or normal. The expectation is that gains will be made from the passage of time, and not stock price movement.

The Trade: Sell put(s) using the strike price nearest the current stock price, and a near term expiration date, and buy put(s) using the same strike price and an expiration date further out in time.

Gains when: Stock price stays in a narrow range, while near-term short puts lose value due to the passage of time.

Maximum Gain: Must use an options calculator or graphing software. Usually about equal to the initial debit.

Loses when: Stock goes up or down beyond the breakeven points, or before expiration if volatility falls too much.

Maximum Loss : Limited to the initial debit.

Breakeven Calculation: There are two breakeven points, above and below the ATM strike. An options calculator or graphing software is necessary to calculate because the breakevens depend on the volatility.

Advantages compared to stock: Ability to profit from no stock movement, much less capital required, "built-in" stop loss.

Disadvantages compared to stock: Greater risk of 100% loss of the capital invested, no dividends, limited life, too much stock movement up or down is harmful to the strategy.

Volatility: after entry, increasing implied volatility is positive.

Time: after entry, the passage of time is positive.

Margin Requirement : None. Initial debit must be paid in full.

Variations: Calendar Put, ITM; Calendar Put OTM.

Synthetic Equivalent: No true synthetic, but a Calendar Call using same strikes and expiration dates is a nearly identical position.

Comments

  • A Calendar is probably the most commonly used "neutral" strategy, meaning a strategy that can gain from a stock that does NOT rise or fall.
  • The theory of a Calendar is that you are selling near-term options, and their value will decay with the passage of time faster than the value of the long-term options you buy. This is an example of the Greek "theta": options with less time remaining to expiration lose value faster than options with more time remaining.
  • The upper and lower breakeven points of a Calendar are determined by the volatility of the stock. A stock with higher volatility will have a wider range of profitability. However, buying a Calendar when the stock is at historically high volatility is a bad idea. The volatility returning to normal levels can easily overcome the gains from the passage of time.
  • Even though a Calendar starts out "neutral", the longer you hold it the less neutral it becomes. In the graph at the top of the page, you can see that even a 3 point move up or down on the day of entry doesn't cause much of a loss. The closer to expiration, the more any stock move up or down would hurt the position. See the Delta Neutral Trading page for more information.
  • Besides being used for just a "neutral" outlook on a stock, a Calendar Put might be used if your outlook was "near term neutral, far term bearish". Such a situation might occur a couple months before a stock reported earnings. In the near term, you don't expect the stock to move, but in the far term you want to be bearishly positioned. You would want to have the near term short puts expire worthless, and continue to hold the far term long puts for possible gain. A Calendar Put is a much less risky bet than two separate trades of selling puts naked in the near term, and then buying long puts in a month or so.
  • Very long-term Calendar Puts can be used if you expect no stock movement now, but bearish movement "sometime", not necessarily in two months. For instance, you can construct a Calendar by selling the near term, and using LEAPs for the long term. In this way, you might be able to collect premium every month that the stock does not move, while being bearishly positioned if the stock does move lower. This is very tricky: if the stock rises, you won't be able to collect much premium on short puts with the same strike as your long puts. If the stock falls while you hold short puts, the whole position will go against you instead of for you.
  • Other variations of Calendars can be used if you have a near term bullish or bearish opinion on a stock or ETF, and want to target a "sweet spot" higher or lower than the current price. See Calendar Call, OTM for a bullish strategy, and Calendar Call, ITM for a bearish strategy.
  • Calendar Puts and Calendar Calls have nearly identical profit graphs. There may be some advantage to using one or the other based on the initial debit available in the market, or your long-term bullish or bearish outlook on the stock itself.

Exits

  • Since this is a neutral position, the trader is expecting the stock to go nowhere. If the stock does start to move, it is usually wise to exit the trade, taking less than the maximum possible loss. Using the graph at the top of the page, you might exit if the stock got to about 46 or 54 within two weeks, and your loss would be about half the maximum possible.
  • Many Calendar strategy traders with a gain try to be out of the trade with a week left to expiration. See the Delta Neutral Trading page for reasons why.
  • Over the long term, successful Calendar traders try to beat the market by having many small gains, and fewer small losses. They do not usually take the maximum loss nor try to squeeze every penny out of the winners.
  • If the reason for entry of the trade was to gain from the stock going nowhere in the near term, but hold long puts in case of a bearish move in the long term, then the trader would attempt to hold the position until expiration, assuming the short puts have a chance of expiring worthless. Then the long puts can be held with the expectation of a bearish move, like any other long put position. Even though you collected premium from the short puts, you should not expect to have any sort of a "bargain" on your long puts, because time has passed since you bought them, and the stock has not moved yet.

Adjustments

  • If the stock moves near one of the breakeven points, it is possible to adjust a Calendar Put into a "Double Calendar" by buying another Calendar Put at a higher or lower strike price, whichever way the stock is moving. This will give a higher overall breakeven point if the stock is moving up, or lower if the stock is moving down. However, this is not a guaranteed fix: the stock could whipsaw.

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