Tim Olson
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34 lines
1.7 KiB
Markdown
34 lines
1.7 KiB
Markdown
---
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description: "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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tags: [options, income, neutral, calendar-spread]
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---
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# Calendar Put Spread
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**Section**: 2.19 | **Asset Class**: Options | **Type**: Income
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## Overview
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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.
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## Construction
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- Buy 1 put option at strike K, TTM T' (longer expiry)
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- Sell 1 put option at strike K, TTM T < T' (shorter expiry), same strike
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Net debit: D
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## Payoff Profile
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At t = T (expiry of short put), let V = value of the long put (expiring at T') assuming S_T = K:
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- P_max = V - D (if S_T = K at short expiry)
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- L_max = D (net debit paid)
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If K <= S_T <= S_stop-loss, the trader can roll by writing another put with strike K and TTM T1 < T'.
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## Key Conditions / Signals
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- Neutral to mildly bearish; expects stock to remain near K through T
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- Low volatility environment after entry is ideal
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- Best suited for income generation by repeatedly selling shorter-dated puts against the long put
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## Notes
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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.
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