Long Calendar Spread with Puts

Overview:

Calendar spreads often require significant diligence from investors due to the options expiring in different months. The strategy is also referred to a as a ‘time spread’ due to the different expiration months. The investor employs this strategy by selling an at-the-money put option in the earlier month and purchasing an at-the-money put option in the later month.

Main Uses:

1. The first reason an investor would invest in a long calendar spread with puts is to take advantage of time decay on the front-month option. The investor is hoping the back-month put will have significant time value.
2. The second reason an investor would invest in a long calendar spread with puts is if the investor expects the underlying stock price not to move significantly between now and the expiration of the front-month put option.

Profit / Loss Long Calendar Spread with Puts:

The below graph is a profit / loss graph of a long calendar spread with puts using the OptionsHouse P&L calculator. The current stock price is $114.08. An at-the-money put option was sold with an expiration during this month with a strike price of $114. An at-the-money put option was purchased with an expiration during next month with a strike price of $114. The break-even prices are $125.35 and $115.75. If the stock price remains between those two prices the investor will make money.

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