Tim Olson
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description, tags
| description | tags | ||||
|---|---|---|---|---|---|
| A horizontal spread buying a longer-dated ATM put at TTM T' and selling a shorter-dated ATM put at the same strike K with TTM T < T', profiting from time decay when stock stays near K. |
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Calendar Put Spread
Section: 2.19 | Asset Class: Options | Type: Income
Overview
The calendar put spread (horizontal spread) consists of a long position in a near-ATM put option with TTM T' and a short position in a put option with the same strike K but shorter TTM T < T'. This is a net debit trade. The trader's outlook is neutral to bearish. The best case at expiration of the short put (t = T) is if the stock price is right at the strike (S_T = K), maximizing the remaining value V of the long put.
Construction
- Buy 1 put option at strike K, TTM T' (longer expiry)
- Sell 1 put option at strike K, TTM T < T' (shorter expiry), same strike
Net debit: D
Payoff Profile
At t = T (expiry of short put), let V = value of the long put (expiring at T') assuming S_T = K:
- P_max = V - D (if S_T = K at short expiry)
- L_max = D (net debit paid)
If K <= S_T <= S_stop-loss, the trader can roll by writing another put with strike K and TTM T1 < T'.
Key Conditions / Signals
- Neutral to mildly bearish; expects stock to remain near K through T
- Low volatility environment after entry is ideal
- Best suited for income generation by repeatedly selling shorter-dated puts against the long put
Notes
This strategy resembles the covered put strategy in structure. While maintaining the long put, the trader can generate income by periodically selling put options with shorter maturities. The stop-loss price S_stop-loss defines the level above which the entire position is unwound.