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Calendar Put Option Strategy

Calendar Put Option Strategy

What is Calendar Put Option Strategy?

  • Calendar Put Option Strategy is a neutral Strategy wherein you buy ATM call next expiry and sell ATM current expiry (Weekly or Monthly). Calendar Put is also known as horizontal Spread. This Strategy is net debit, low risk, directional neutral strategy that generates profit from the pass of time and an increase in Implied volatility.

When to Execute?

  • Calendar Put needs to be executed when you expect stock to rise steadily and not too far too fast. The objective is to generate income against long term options by selling near term options and gaining premium. Good to execute on Indices weekly options because of good liquidity, Next and far month contracts of few stocks are sometimes less liquid.

What is the Trade?

  • If we have the neutral view, we can sell ATM Put of current expiry, buy the next ATM Put. In Addition to this, if we have a bullish or bearish view, we can shift the calendar to OTM or ITM respectively.

What will be maximum profit?

  • Calendar Put maximum profit is realised when stock price closes exactly at sold strike price on the expiry. Because long put will have the maximum time value and sold put will expiry worth less. Calendar put will be in profit if underlying stays between the breakeven point on expiry.

What will be maximum loss?

  • Maximum risk on the trade itself is limited to the net debit of the bought Put minus the sold Put.

What are the advantages?

  • Generate monthly income. Can profit from range bound stocks and make a higher yield than with a Covered Call.

What are the disadvantages?

  • Capped upside if the stock rises. . Can lose on the upside if the stock rises significantly. High yield does not necessarily mean a profitable or high probability profitable trade.

Example of Calendar Put:

  • Suppose Nifty is Trade 15800. Weekly Calendar Call. Nifty future price is 15800. Calendar call can be executed by selling PE current Weekly Expiry 15800 PE @ 140 and Buying Next Week expiry 15800 PE @ 190. Max Profit will be earned market stays around 15800.00