Put Calendar Spread: 5 Best Tips
The put calendar spread is an advanced options trading strategy. It is favoured by traders who have a high amount of capital and by traders who have a good knowledge of option greeks like time decay and volatility. Put Calendar Spread is a conservative way to grow your capital. Many old investors in the stock market use it. This strategy has one of the highest potential of growth and not only the growth but also one of the highest probability of profit. The strategy is quite simple, it involves simultaneously buying a longer-term put option and selling a shorter-term put option at the same strike price. It is used and most effective in a market where little movement is expected in the short-term but with potential shifts over the longer term. In this article, we will dive deep into the 5 steps you need to master this strategy and have good results but remember there is no guarantee that a strategy will work every single time.
Steps:
Step 1: What is a put Calendar Spread? A put calendar spread which is often referred to as a calendar spread uses two put options. You have to buy a put option with a longer expiration date and sell another put with the same strike price but a shorter expiration date. For example let us assume the year is 2027 and the month is June, then you might wanna buy a put option of December 2027 expiry and sell a put option of September 2027 expiry both at the same strike price. The point is to benefit from the decay of the time value of the short term option at a faster rate than that of the long term put option which is getting decayed at a slower rate. This works mostly when the volatility is low.
Step 2: Setting Up Your Trade Now you need to use your analysis to determine your market expectations. You need to predict the market conditions for a long period of time in order to determine what the best strategy will be. For example there is little volatility and there is no upcoming event which can cause a significant change to the volatility then the put calendar spread can be used. Start by selecting a strike price that aligns with your market expectations. When selecting the strike price, keep in mind that it should be out of the money strike price. Next is the expiration dates, the short-term put should in most cases expire in about one to three months whereas the long-term put should be at least six months or more. Keep a track of all the upcoming market events and know when to use this strategy and when not to so that you don’t end up in a loss with this beautiful strategy. , By news such as earnings announcements or economic data releases or elections etc. These factors can affect the implied volatility priced into options contracts and impact the spread’s performance.
Step 3: Calculating Risks and Potential Rewards Calculating the potential rewards and risks associated with put calendar spreads is important. Don’t lower your risk so much that you only make like 5-10% return in a year as 1 or 2 losing trades might wipe off all the profits generated through this strategy. Also don’t increase your risk too much that you have a high probability of loss. The maximum risk is limited to the net premium paid for the spread. For potential rewards, the profit peak occurs if the stock price or whatever instrument you are using this strategy on is near the strike price at the short put’s expiration date. However, keep in mind if the stock moves significantly away from the strike price, the strategy may result in a loss. We recommend using an options profit calculator such as Sensibull for the Indian market and OptionStrat for the US market.
Step 4: Managing the Trade Your job is just not done when you have executed the trade. You need to regularly monitor and manage the trade. Be sure to also monitor the market conditions and upcoming events which could result in a significant volatility. Always be prepared to make adjustments if the market moves against your position. A typical solution for a move against the trade might include switching the short put to a further expiration date if it is in danger of finishing in the money instead of out of the money. It is also a good decision to set profit targets and stop-loss levels beforehand to systematically manage the trade and your expectations.
Step 5: Learning from Experience Every time you execute a trade you learn a lesson. You get to learn how the strategy performs for every condition and stock. Every strategy works differently in every condition and put calendar spreads are no exception. So you need to analyse when to execute this strategy. Maintaining a detailed trading journal can help you track performance, refine your strategies and eventually perform better in the stock market with a much better return. Record your trades with market conditions, volatility, events etc. Over time, this record will provide invaluable insights that can enhance your performance in the market.
Conclusion Put calendar spreads in options trading can offer disciplined traders a strategic advantage. Although this strategy makes a very low profit but remember most of the people in the stock market are losing money and those with these conservative strategies are making money with low profits. These strategies are used by rich and disciplined old players of the market. As with any trading strategy, practice, persistence, and continuous learning are the key to success.
Implementing Put Calendar Spread through Algorithmic Trading is a good way. Here is an article on an algorithmic trading platform AlgoRooms Review
nvestopedia. (n.d.). Put Calendar. Retrieved from https://www.investopedia.com/terms/p/put-calendar.asp#:~