Calendar put

Article contents



At a glance



Setting up the strategy

  1. Sell one near-term, at-the-money put option on the underlying stock.

  2. Buy one long-term, at-the-money put option on the same underlying stock.
Ideally you want the stock price to be above strike price when the near-term put option expires, and below the strike price of the long-term put option at expiration.

Who should run this?


Intermediate to advanced traders.

Margin requirements


Learn more about Questrade’s option margin requirements.


Strategy overview



A calendar put is an option strategy in which a trader buys a long-term put and sells a near-term put option simultaneously, each with identical strike prices.

Market outlook


  • Neutral

Strategy benefits


  • Can profit from volatility and time decay.
  • Maximum loss is limited to the initial debit to enter into the strategy.
  • Several near-term put options can be sold if the long-term put option expires several months into the future, allowing you to potentially profit multiple times.

Strategy downsides


  • Profit is limited if the underlying stock price rises before the near-term put option expiry.

Calendar put example



Scenario


ABC shares are currently trading at $31 in February 2013, and you believe the stock will remain within the same trading range in the near-term. To set up a calendar put strategy, you decide to do the following:


  • Sell one March 2013, $34 put option for $325(3.25 option premium x 100 shares)
  • Buy one January 2014, $34 put option for $525 (5.25 option premium x 100 shares)
To enter into this strategy, you will be initially debited $200.

Possible results


  1. At expiry in March, the stock rises slightly to $34.15, meaning the near-term put option expires worthless, leaving you with the long-term put option. Let’s say that the stock freefalls and at expiry in January 2014, it’s trading at $27. This means that the long-term put option would be assigned, resulting in a profit of $500 after subtracting the initial $200 debit.

  2. Another scenario would be to sell another near-term put option after the first near-term put expires worthless, especially if the long-term put expires several months later. If the second near-term put expires worthless, you’ll profit again. You can repeat this process if you feel the stock will stay within a tight trading range in the near term.

  3. At the end of the near-term and long-term put expirations, let’s assume ABC shares are trading at $36, both options would expire worthless.

Profit and loss explained



Maximum profit


  • Maximum profit = option premium to buy long-term put option - option premium received from near-term put option + expiration value of long-term put

Maximum loss


  • Maximum loss = initial debit required to enter into the strategy

Break-even at expiration


  • Given the two expiration dates, there are too many variables are in play to accurately predict the break-even point.

Sample calculations



  • Stock value at start of strategy: $31
  • To execute the strategy: Sell $34 put option for $325, Buy $34 put option for $525
  • Result: $200 net debit

Result 1 profit and loss


Stock price at expiration Profit and loss calculations 
Stock price at near-term expiration
$34.15 in Mar 2013
$3.25 (short put option premium received per share)
x 100 (1 option contract comprised of 100 shares)
minus
$5.25 (long put option premium paid per share)
x 100 (1 option contract comprised of 100 shares)
= $200 net debit


Stock price at long-term expiration
$27 in Jan 2014

$34 (strike price)
–$27 (stock price at long-term expiration)
x 100 (1 option contract comprised of 100 shares)
–$200 (long put option premium paid)
= $500 profit


Result 2 profit and loss


Stock price at expiration Profit and loss calculations 
Stock price at first near-term expiration
$34.15 in Mar 2013
$3.25 (short put option premium received per share)
x 100 (1 option contract comprised of 100 shares)
minus
$5.25 (long put option premium paid per share)
x 100 (1 option contract comprised of 100 shares)
= $200 net debit


Stock price at second near-term expiration
$34.30 in April 2013
In this case, you would already realize a profit if you wrote a second near-term put option that expires worthless, without taking into account the direction of the long-term put option.


$3.60 (second short put option premium received per share)
x  100 (1 option contract comprised of 100 shares)
minus
$200 net debit
= $160 profit



Result 3 profit and loss


Stock price at expiration Profit and loss calculations 
Stock price at near-term expiration
$36 in Mar 2013
Both put options expire worthless, meaning your loss would be limited to the initial net debit.

$3.25 (short put option premium received per share) x 100 (1 option contract comprised of 100 shares)
minus
$5.25 (long put option premium paid per share) x 100 (1 option contract comprised of 100 shares)
= $200 net debit

Stock price at long-term expiration
$36 in Jan 2014


Note: commission fees are not included in the above calculations.


Payoff diagram







Creating a calendar put







Standard order details

Order detail

Description

Symbol lookup field

Click  and change the mode to . Then enter the symbol you want to buy or sell. The default expiration date, strike price, and strategy appear. 




Tip: click the Option tab to view a more detailed option quote.

Modify the expiration date, strike price, and option strategy accordingly. For more information, see Elements of an option quote.
Action

The buy or sell action is set for you when you select the strategy type.

Qty

Select a value using the arrows , or enter a value manually.

Note: by default, the quantity will be populated with the value set in your user preferences.
Order type Select the type of order you want to submit. When creating strategy orders, only Limit or Market order types are available. For more information, see Order types.

The limit order type requires you to fill in additional fields. Refer to the table section below for details.
Duration

Select a duration to specify how long the order should remain active. For more information, see Order durations.

Route Select a route or leave the selection at Auto to let the platform determine the best one. Canadian routes will be listed for Canadian symbols and U.S. routes will be listed for U.S symbols.
Sub-route

This field will be filtered according to the route selection. It indicates where you prefer the order to be executed. Leave the selection at Auto to let the platform determine the best route.

Note: sub-route selection is only available for Canadian symbols.
Order type-specific details
Limit price Enter your limit price:

  • To have the price fluctuate according to real-time data, select . The icon changes to a lock icon , which locks the limit price. Once locked, use the refresh button to automatically update your limit price.
  • To choose a custom price, select .
Note: if real-time market data is not available, the limit price will be blank and the float limit icon will be unlocked.






Note: the video tutorial above shows how to create a calendar put strategy using IQ Edge; however, the principles are the same for IQ Web.
Tip: for an optimized viewing experience, watch the video on YouTube in full 720p HD. To open the video in YouTube, click the YouTube button in the bottom right corner of the video window and select the change settings icon to modify the video quality.


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