option-info and options-graphs sites:
Horizontal Spread, Time Spread
Outlook: Bearish 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 drop in the stock price.
Sell put(s) using the next strike price below 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 lower, 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 falls below the lower breakeven point, or does not fall
below the upper breakeven point, or before expiration if volatility falls
Loss : Limited to the initial debit.
Calculation: There are two breakeven points, above and below the
OTM strike. An options calculator or graphing software is necessary to
calculate because the breakevens depend on the volatility.
compared to short stock: Increased leverage, much less capital required,
"built-in" stop loss.
compared to short stock: Greater risk of 100% loss of the capital
after entry, increasing implied volatility is positive.
after entry, the passage of time is positive IF the stock moves lower.
Requirement : None. Initial debit must be paid in full.
Calendar Put, ATM; Calendar Put ITM.
Equivalent: No true synthetic, but a Calendar Call using same strikes
and expiration dates is a nearly identical position.
- An OTM
Calendar Put can be used instead of positioning bearishly with short
stock, ATM long puts, OTM long puts, or ATM Bear
to short stock, the strategy has much less risk and more leverage.
to ATM long puts and ATM Bear Puts, the initial debit is less, which
means the breakeven point is closer.
to OTM long puts, much less stock movement is needed for a gain.
The OTM Calendar Put has it's maximum gain where the OTM long put
would still not be at breakeven.
compared to either type of put by itself, the passage of time helps
the Calendar, IF the stock falls.
the OTM Calendar Put has a "sweet spot", and if the stock
falls 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 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 falling, and
the passage of time.
variations of Calendar Puts can be used if you have a near term neutral
or bullish opinion on a stock or ETF, and want to target a "sweet
spot" at or higher than the current price. See Calendar
Put, ATM for a neutral strategy, and Calendar
Put, ITM for a bullish 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 bearish position, the trader is expecting the stock to fall.
If the stock does not fall, 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 rose to about 52 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.