Put is a "neutral" option strategy, meaning a strategy that
can gain from a stock that does NOT rise or fall.
option-info and options-graphs sites:
Horizontal Spread, Time Spread
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.
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.
when: Stock price stays in a narrow range, while near-term short
puts lose value due to the passage of time.
Gain: Must use an options calculator or graphing software. Usually
about equal to the initial debit.
when: Stock goes up or down beyond the breakeven points, or before
expiration if volatility falls too much.
Loss : Limited to the initial debit.
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.
compared to stock: Ability to profit from no stock movement, much
less capital required, "built-in" stop loss.
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.
after entry, increasing implied volatility is positive.
after entry, the passage of time is positive.
Requirement : None. Initial debit must be paid in full.
Calendar Put, ITM; Calendar
Equivalent: No true synthetic, but a Calendar Call using same strikes
and expiration dates is a nearly identical position.
- 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.
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.
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.
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.
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
- 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.
- 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.