Put Calendar

What Is a Put Calendar?

A put calendar is an options strategy that involves selling a near-term put contract and buying a second put with a longer-dated expiration. For example, an investor may buy a put option with 90 days or more until expiration, and simultaneously sell a put option with the same strike price that has 45 days or less until expiration.

Understanding a Put Calendar

A put calendar is utilized when the short-term outlook is neutral or bullish, but the longer-term outlook is bearish. To profit, an investor needs the underlying price to trade sideways or higher over the time remaining on the put that was sold, then fall before the time remaining on the put that was bought expires. The put calendar requires paying a premium to start the position, given that the two options contracts have the same strike price.

The put calendar takes advantage of time decay. That is, since the options have the same strike price, there is no intrinsic value to capture. So, when looking to take advantage of time value, the major risk is that the option gets deep in- or out-of-the-money, in which case, the time value quickly disappears.

A variation of the put calendar involves rolling the strategy forward by writing another short-term option contract when the previous one expires and then continuing that until the underlying moves significantly or the long-term option expires.

During the life of the near-term option, the potential profit is limited to the extent that 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.

An increase in implied volatility (IV), all other things being 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.

Put Calendar Example

An example of a put calendar involves buying a 60-day put contract with a strike price of $100 for $3 and selling a 30-day put with the same strike for $2. The maximum gain would be the strike price less the net premium paid, or $99, which is $100 - ($3 - $2). The maximum loss is the net premium paid, which is $1, or $3 - $2.

The max gain happens when the stock trades at exactly the strike price on expiration at the date of the near-term option. That option expires worthless and the investor is left with the long put. If the stock falls to zero before the next expiration, the investor could still sell that stock for $100 — less the $1 paid for the options — and the max gain of $99 is realized.

The max loss happens if the stock price either rises so both options expire worthless or the options fall so much that they trade at their intrinsic value. The loss there is the net premium paid.