The In the
Money Calendar Put is a bullish option strategy than can be entered for
a small debit.
option-info and options-graphs sites:
Horizontal Spread, Time Spread
Outlook: Bullish on stock price movement, and Implied Volatility
currently low or normal. The expectation is that gains will be made from
the passage of time as well as a rise in the stock price.
Sell put(s) using the next strike price above 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 moves higher, while near term short puts lose value due
to the passage of time.
Gain: Must use an options calculator or graphing software. Usually
more than the initial debit.
when: Stock does not rise higher than the lower breakeven point,
or rises beyond the upper breakeven point, or before expiration if volatility
falls too much.
Loss : Limited to the initial debit.
Calculation: There are two breakeven points, above and below the
ITM strike. An options calculator or graphing software is necessary to
calculate because the breakevens depend on the volatility.
compared to stock: Increased leverage, much less capital required,
"built-in" stop loss.
compared to stock: Greater risk of 100% loss of the capital invested,
no dividends, limited life, limited maximum gains.
after entry, increasing implied volatility is positive.
after entry, the passage of time is positive IF the stock moves higher.
Requirement : None. Initial debit must be paid in full.
Calendar Put, ATM; Calendar Put OTM.
Equivalent: No true synthetic, but a Calendar Call using same strikes
and expiration dates is a nearly identical position.
- An ITM
Calendar Put can be used instead of positioning bullishly with stock,
ATM long calls, OTM long calls, or ATM Bull
to stock, the strategy has much less risk and more leverage.
to ATM long calls and ATM Bull Calls, the initial debit is less,
which means the breakeven point is lower.
to OTM long calls, much less stock movement is needed for a gain.
The OTM Calendar has it's maximum gain where the OTM long call would
still not be at breakeven.
compared to either type of call by itself, the passage of time helps
the Calendar, IF the stock rises.
the ITM Calendar Put has a "sweet spot", and if the stock
rises too much the position will be hurt. This is not the case for
any of the other positions.
- The upper
and lower breakeven points of a Calendar strategy 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 both the
stock price rising, and the passage of time.
variations of Calendar Puts can be used if you have a near term neutral
or bearish opinion on a stock or ETF, and want to target a "sweet
spot" at or lower than the current price. See Calendar
Put, ATM for a neutral strategy, and Calendar
Put, OTM 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.
you are positioning bullishly for a debit entry, you may want to check
the cost of simply buying a long call. The long call has the advantage
if the stock should rise higher than you expect.
this is a bullish position, the trader is expecting the stock to rise.
If the stock does not rise, 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 dropped to about 48 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
stock stays near or 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.