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Long Calendar Spread with Puts

AKA Time Spread; Horizontal Spread

NOTE: The profit and loss lines are not straight. That’s because the back-month put is still open when the front-month put expires. Straight lines and hard angles usually indicate that all options in the strategy have the same expiration date.

The Setup

  • Sell a put, strike price A (Approx. 30 days from expiration — “front-month”)
  • Buy a put, strike price A (Approx. 60 days from expiration — “back-month”)
  • Generally, the stock will be at or around strike A

Who Should Run It

Veterans and higher

NOTE: The level of knowledge required for this trade is considerable, because you're dealing with options that expire on different dates.

When to Run It

You’re anticipating minimal movement on the stock within a specific time frame.

The Sweet Spot

You want the stock price to be at strike A when the front-month option expires.



About the Security

Options are contracts which control underlying assets, oftentimes stock. It is possible to buy (own or long) or sell (“write” or short) an option to initiate a position. Options are traded through a broker, like TradeKing, who charges a commission when buying or selling option contracts.

Options: The Basics is a great place to start when learning about options. Before trading options carefully consider your objectives, the risks, transaction costs and fees.

The Strategy

When running a calendar spread with puts, you’re selling and buying a put with the same strike price, but the put you buy will have a later expiration date than the put you sell. You’re taking advantage of accelerating time decay on the front-month (shorter-term) put as expiration approaches. Just before front-month expiration, you want to buy back the shorter-term put for next to nothing. At the same time, you will sell the back-month put to close your position. Ideally, the back-month put will still have significant time value.

If you’re anticipating minimal movement on the stock, construct your calendar spread with at-the-money puts. If you’re mildly bearish, use slightly out-of-the-money puts. This can give you a lower up-front cost.

Because the front-month and back-month options both have the same strike price, you can’t capture any intrinsic value. You can only capture time value. However, as the puts get deep in-the-money or far out-of-the-money, time value will begin to disappear. Time value is maximized with at-the-money options, so you need the stock price to stay as close to strike A as possible.

For this Playbook, I’m using the example of a one-month calendar spread. But please note it is possible to use different time intervals. If you’re going to use more than a one-month interval between the front-month and back-month options, you need to understand the ins and outs of rolling an option position.

Maximum Potential Profit

Potential profit is limited to the premium received for the back-month put minus the cost to buy back the front-month put, minus the net debit paid to establish the position.

Maximum Potential Loss

Limited to the net debit paid to establish the trade.

NOTE: You can’t precisely calculate your risk at initiation of this strategy, because it depends on how the back-month put performs.

Break-even at Expiration

It is possible to approximate break-even points, but there are too many variables to give an exact formula.

Because there are two expiration dates for the options in a calendar spread, a pricing model must be used to “guesstimate” what the value of the back-month put will be when the front-month put expires. TradeKing’s Profit + Loss Calculator can help you in this regard. But keep in mind, the Profit + Loss Calculator assumes that all other variables, such as implied volatility, interest rates, etc., remain constant over the life of the trade — and they may not behave that way in reality.

TradeKing Margin Requirements

After the trade is paid for, no additional margin is required if the position is closed at expiration of the front-month option.

As Time Goes By

For this strategy, time decay is your friend. Because time decay accelerates close to expiration, the front-month put will lose value faster than the back-month put.

Implied Volatility

After the strategy is established, although you don’t want the stock to move much, you’re better off if implied volatility increases close to front-month expiration. That will cause the back-month put price to increase, while having little effect on the price of the front-month option. (Near expiration, there is hardly any time value for implied volatility to mess with.)

Option Guy's Tips

  • When establishing one-month calendar spreads, you may wish to consider a “risk one to make two” philosophy. That is, for every net debit of $1 at initiation, you’re hoping to receive $2 when closing the position. Use the TradeKing’s Profit + Loss Calculator to estimate whether this seems possible.
  • To run this strategy, you need to know how to manage the risk of early assignment on your short options.


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