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Long Put Calendar Spread

This strategy involves selling a near-term put option and buying a longer-term put option with the same strike price, known as a horizontal put calendar spread. The investor is bullish in the near-term but bearish long-term, and can profit if the stock price remains steady or rises before the first option expires, leaving them with only the longer-term put. The maximum gain is reached if the stock is at the strike price when the first option expires. The maximum loss is limited to the net premium paid to open the position.

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299 views3 pages

Long Put Calendar Spread

This strategy involves selling a near-term put option and buying a longer-term put option with the same strike price, known as a horizontal put calendar spread. The investor is bullish in the near-term but bearish long-term, and can profit if the stock price remains steady or rises before the first option expires, leaving them with only the longer-term put. The maximum gain is reached if the stock is at the strike price when the first option expires. The maximum loss is limited to the net premium paid to open the position.

Uploaded by

pkkothari
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Equity Options

Strategy

MONTRÉAL EXCHANGE
Bear Put Spread
Long Put Calendar Spread
(Put Horizontal)

Description
To enter into a long put calendar spread, an investor sells one near-term put option and buys a second put
option with a more distant expiration. The strategy most commonly involves puts with the same strike (horizontal
spread), but can also be done with different strikes (diagonal spread).

Outlook
The investor is looking for either a steady to slightly rising stock price during the life of the near-term option and
then a move lower during the life of the far-term option, or a sharp rise in implied volatility levels.

Summary
This strategy combines a longer-term bearish outlook with a near-term neutral/bullish outlook.

If the stock remains steady or rises during the life of the near-term option, it will expire worthless and leave the
investor owning the longer-term option. If both options have the same strike price, the strategy will always require
paying a premium to initiate the position.

Long Put Calendar Spread Example


Net Position
+ Short 1 XYZ near 60 put
Long 1 XYZ far 60 put

MAXIMUN GAIN
Strike price - net premium paid
0
50 55 60 65 70
MAXIMUN LOSS
Net premium paid

-
Motivation
The investor is hoping the sale of the near-term put offsets the cost of purchasing a longer-term put.

Variations
The strategy described here involves two puts with the same strike but a different expiration, i.e., a horizontal
spread. A diagonal spread, involving two puts with different strikes as well as expirations, would have a slightly
different profit/loss profile. The basic concepts, however, would continue to apply.

Max Loss
The maximum loss would occur should the two options reach parity. This could happen if the underlying stock rose
enough that both options became worthless, or if the stock declined enough that both options went deep in-the-money
and traded at their intrinsic value. In either case, the loss would be the premium paid to establish the position.

Max Gain
At the expiration of the near-term option, the maximum gain would occur should the underlying stock be at the
strike price of the expiring option. If the stock were any lower the expiring option would have intrinsic value, and
if the stock were any higher the longer-term option would have less value. Once the near-term option has expired
worthless, the investor is left with simply a long put, whose potential profit is limited only because the stock
cannot go below zero.

Profit/Loss
During the life of the near-term option, the potential profit is limited to the extent the near-term option declines
in value more quickly than the longer-term option. Once the near-term option has expired, however, the strategy
becomes simply a long put whose potential profit is substantial. The potential loss is limited to the premium paid
to initiate the position.

Breakeven
Since the options differ in their time to expiration, the level where the strategy breaks even is a function of the
underlying stock price, implied volatility and rates of time decay. Should the near-term option expire worthless,
breakeven at the longer-term option’s expiration would occur if the stock were below the strike price by the
amount of the premium paid. But of course it could occur at any time should the position be closed out for a credit
equal to the debit paid when the position was initiated.

Volatility
An increase in implied volatility, all other things equal, would have an extremely positive impact on this strategy. In
general, longer-term options have a greater sensitivity to changes in market volatility, i.e., a higher Vega. Be aware,
however, that the near and far-term options could and probably will trade at different implied volatility levels.

Time Decay
The passage of time, all other things equal, would have a positive impact on this strategy in the beginning. That
changes, however, once the near-term option has expired and the strategy becomes simply a long put whose
value will be eroded by the passage of time. In general, an option’s rate of time decay increases as its expiration
draws nearer.

2
Assignment Risk
Early assignment, while possible at any time, generally occurs for a put only when it goes deep-in-the-money.
Should early exercise occur, using the longer-term option to cover the assignment would require financing a long
stock position for one business day.

And be aware, a situation where a stock is involved in a restructuring or capitalization event, such as a merger,
takeover, spin-off or special dividend, could completely upset typical expectations regarding early exercise of
options on the stock.

Expiration Risk
Should the near-term put (the short side of the spread) be exercised when it expires, the longer-term put option
would remain to provide a hedge. However, assignment on the near-term put would result in the investor entering
into a long stock position.

If the longer-term put were held into expiration, it could be subject to auto-exercise if in-the-money.

Comments
The difference in time to expiration of these two put options results in their having a different Theta, Delta and
Gamma. Obviously, the near-term put suffers more from time decay, i.e., has a higher Theta. While the near-term
put may often have a lower Delta, its Gamma may be higher (if the strike is at-the-money). This means that if
the stock moves sharply lower, the near-term put becomes much more sensitive to the stock price and its value
approaches that of the more expensive longer-term put. A common variation of this strategy is to write another
short-term option each time the previous one expires, until such time as the underlying stock moves significantly
or the longer-term put approaches expiration.

Related Position
Comparable Position: N/A

Opposite Position: Short Put Calendar Spread

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