Put Calendar Spread Strategy

The Put Calendar Spread is a time-based options strategy that involves selling a short-term put and buying a longer-term put at the same strike price. It’s designed to profit from minimal price movement in the near term and increased volatility or downward movement in the longer term. Traders use this strategy when they expect the underlying asset to stay near a specific price before eventually declining.

Structure

• Sell 1 short-term put (near expiration)
• Buy 1 long-term put (later expiration)
• Both puts have the same strike price

Profit & Loss Profile

• Max Profit: Occurs if the stock is near the strike price at short put expiration
• Max Loss: Limited to the net debit paid to enter the trade
• Breakeven: Depends on time value and volatility of the long put after short put expires

Ideal Market Conditions

• Neutral to slightly bullish short-term outlook
• Expecting increased volatility or bearish movement after short put expires
• Best when implied volatility is low at entry and expected to rise

Example

A stock is trading at $100. You:

• Sell 1 put expiring in 1 week at $100 for $2
• Buy 1 put expiring in 1 month at $100 for $5

Net debit = $3. If the stock stays near $100, the short put expires worthless and the long put retains value. If the stock drops afterward, the long put gains further.

Risks & Considerations

• Requires precise timing and volatility forecasting
• Early assignment risk on short put if in-the-money
• Time decay works against the long put after short put expires