Calendar spread: Protecting a short credit spread position

reference to Kite protection, if you were short 8 of the Jan RUT 520/530* put spreads, would a 550 Feb-Jan put calender serve as
temporary protection in case of a further RUT fall towards, but no father
than 550?

*I later learned Steve. meant the 510/520P spread, but the conversation is not affected.

I have tried generating risk graphs of OTM put calendars with OTM
put spreads, but not sure if they are accurate in their risk



Hi Steve,

1) Yes.  The calendar serves as temporary, but limited protection

Consider this:  If RUT moves to 550 'and no farther' you will not need much, if any, protection.  The usual reason for buying insurance is to make the original position less risky.  When short the 520/530 put spread, RUT moving towards 530 represents the big problem.

The insurance purchased should do something that reduces the risk of owning the original trade – in the event that the potential trouble does occur.  And that would be making your position better as RUT approaches  530.  The concept of buying insurance is to generate
profits that partially offset losses resulting from the original trade.

Below is the risk graph for owning 2-lots of the RUT Feb/Jan 550P spread, with 46 days remaining before expiration:


Here's the same position three weeks later:


You can see a profit at the 550 level – as anticipated when the calendar moves to the strike price.  But, where protection is needed (530), you get no help.

2) The problem with calendars is that they are profitable over a limited price range.   If the underlying moves much lower than the strike, the effectiveness of owning the calendar disappears.  If RUT were to move quickly through the strike (550) and head to your big problem area – near 530, there are two big factors that become important:

a) The calendar has already moved past it's most profitable price – and that's near 550.  Thus, as RUT moves lower, the calendar becomes worth less and less.

b) The calendar may possibly continue to maintain its value.  If IV increases sufficiently (spread is + vega) it may offset the continued price decline (the spread is + delta as RUT moves through 550).

For the calendar to provide the protection you seek, you would be advised to exit, with a profit, as RUT reaches 550 (or perhaps a little lower).    There is no point in holding 'protection' that has done what it can do – and is no longer protecting.

Bottom line:  The calendar is okay as a stand alone trade, if you want to make that play, but it does not offer quality protection.  'Quality' means it provides protection. Period, with no chance that protection disappears on a continued price decline, or the passage of time.

NOTE:  To protect the RUT Jan 510/520P credit spread, the Feb/Jan 550 P spread is even less effective than it is in protecting the 520/530P spread.

Here are the graphs combining the 8-lot credit spread with the 2-lot calendar spread:


NOTE:  The solid line is the result at expiration, and the thin line represents 'today.'

At expiration, the calendar makes things worse and increases losses (blue line).

Four weeks from today (see graph below), you have a small profit at the 530 area – from the calendar spread.  This is not good enough.  This is not solid protection.  The credit spread is still losing.    You need protection at all times, not only for a limited time frame.


3) The graphs should be accurate.  If you plot the calendars by themselves (without put spread), you can see how well they do as time passes.  And how they begin to lose some accumulated profits on a price decline.   Their effectiveness is lost when you need it most – when your credit spread is threatened.  That s the reason for the early exit – take the profit you earned and now find better protection for the credit spread.

4) Most traders who use calendars as a protective strategy, open them nearer to the 'trouble' spot.  That means the 540 calendar provides better protection than the 550.  But this is a personal choice and not a rule.  Obviously, being farther OTM, there is less likelihood that the calendar will produce a profit.  Thus, if you seek a profit, the 550 may be okay for you.  If the true purpose of the calendar is to offset losses, I believe the 550 strike is too far removed from your trouble spot.

The 530 strike appears to represent the best calendar.  The problem with that idea is that all your shorts are lumped at a single strike, and all by itself, that's undesirable.

5) If you are looking to trade the calendar as a profit source – that's very different from wanting to use it as protection.  When seeking a profit is your primary motive, then you should choose any strike price that suits your outlook for where the underlying is headed. 

If you buy any calendar spread and eventually collect your profit, that would be the appropriate time to reconsider what to do about your 8-lot spread.  If enough time passes, you could exit.  Or find other protection. 

6) The problem with any calendar spread is that this idea looks attractive, but affords no help on a big gap opening.  Not a likely event, but that comes back to your original concept:  You want protection.  Protection from what? 

A steady decline?  Then the calendar is appropriate. 

A rapid collapse?  The calendar will not help enough because it's not what I refer to as 'quality' protection.

7) When insurance is the goal – and this is my personal perspective – profit is not my motive.  In fact, I'd hope the insurance money is 'wasted' and that the position I am trying to protect never gets into jeopardy. Not everyone looks at it my way, and many want both protection and profit from the insurance – and although you can achieve that, it requires an unlikely outcome: Underlying moving just far enough, but not too far.

8) NOTE:  This is not similar to the kite spread.  The kite provides protection at all times.

All graphs plotted using free software, the Option Strategy Evaluation Tool, available from Peter Hoadley.


9 Responses to Calendar spread: Protecting a short credit spread position

  1. Steve 11/30/2009 at 12:11 PM #

    Thorough answer. Thanks Mark!

  2. Don 11/30/2009 at 1:13 PM #

    Hi Mark, Hope that you had a great Thanksgiving. I like your kite strategy of protection and enjoyed the detailed answer that you gave Steve but I had another thought that I would like your perspectives on with two questions. One concerning strategy and one concerning reasonable expectations especially in light of your comments about the risk/reward of front month trades.
    Lets say that you have the 490/500 590/600 IC and the market is moving towards your sold 500 put. What do you think of the idea of (in lieu of or in conjunction with) a butterfly at the 500 strike? Your max risk is right around there and you can construct a butterfly so inexpensively that reaches the 490.
    Second, and I realize completely that this question is an individual perspective. I was wondering what your expectations are for a “good”, “bad” or “great” year? I know that you said that 2008 was small net loss for you and in context of the year you may consider that great but in a more expansive sense what would someone who is trading IC’s consider a reasonable and attainable rate of return for the year. 1, 5,10,20, 40% I know there is no hard and fast rule just wanted to hear your thoughts about it.
    Thanks again!

  3. Mark Wolfinger 11/30/2009 at 2:03 PM #

    1) Delightful holiday
    2) Hate butterfly at 500 strike. A 500 settlement price is already a big win (assuming you hold position that long). No need to make it bigger.
    And this does very little or nothing if settlement is very near 490 – your worst nightmare.
    Thus a 490 fly serves your purposes better. Of course, that position closes your 490/500 spread and substitutes the 480/490. This butterfly is merely a roll down.
    If cheap enough, go for it.
    3) There is no answer. Return is going to depend on your skills as a risk manager and to some degree, how lucky you were in picking strike prices. I cannot reply to this often-asked question.
    Attainable? It’s possible to make 10% or more in a month. But every month? It’s very unlikely, requires that you take a good deal of risk, have all good luck, with no losses during the year. Sure that can happen, but so what? It’s a meaningless number.
    OTOH, if you adjust very often, are quick to grab profits and take very little risk, you should come ahead, but cannot expect to earn big returns.
    There is just no way for me to know how you will handle positions.

  4. Don 11/30/2009 at 2:25 PM #

    Thank you Mark…appreciate it…I think that at one time I was “sold” on the idea of making a certain % each month and that it seemed very easy to do. Not the case, so I wondered what you saw that worked after 30+ years of seeing all different types of traders including those who made, lost, managed risk well, those who didn’t etc…
    I know what you mean about “10%” not happening every month, and I know that Warren Buffet is happy with 15% year so I was looking for a more experienced view than my own limited perspective.

  5. Mark Wolfinger 11/30/2009 at 2:36 PM #

    You can set any reasonable ‘goal’ each month. To me that’s a bad idea. For example, you may fail to make a needed adjustment because it would jeopardize your monthly result.
    If you can do it, forget the numbers.
    Open positions you want to own, manage risk,pay something to buy back the cheapies, decide if you want to insure your portfolio – and how much to pay. See how it works for you.
    I didn’t see ‘all types’ of traders. As a market maker, I only interacted with other market makers. I had no contact with any individual investors.

  6. greg 11/30/2009 at 8:11 PM #

    Mark – In “Rookies” you have a chapter on insurance. You suggest using a front month long put to cover 2nd or 3rd month put credit spreads. The Kite appears to be using the same month long put along with the credit spread. I don’t see how the credit spreads can pay for the long put using the 4×1 ratio? What am I missing?

  7. Mark Wolfinger 11/30/2009 at 8:35 PM #

    You are not missing anything.
    I’ll post a full explanation tomorrow morning.

  8. Javier Garzon 01/29/2011 at 6:41 PM #

    I am reading up on anything and everything that you have on calendars, especially calendar adjustments. When doing this, I am noticing that I am not getting any of the embedded pictures in your blogs. In this blog, I know you have included some charts to make your point. This is the URL link that I am using to get to your web page (the one without the pictures) I did a search on the internet on this same blog and I was able to find on another website with pictures. The URL is

    This email is just to inform you about some technical issues with your site and nothing related to the Options’ world. Hope you are able to fix the issues.


    • Mark D Wolfinger 01/29/2011 at 9:23 PM #


      Thanks for the heads-up.

      Sadly, the migration of this blog to WordPress resulted the loss of every image. I will try to restore them one at a time, but it’s going to take a long time.