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Calendar Spreads

I just posted four articles on various aspects of trading calendar spreads. They can be found at

  1. Introduction to Calendar Spreads
  2. Market-Neutral Calendar Spreads
  3. Calendar Spreads for Bulls and Bears
  4. Bullish Calendar Spread. An Example
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Is it still a Calendar Spread?


I am wondering about proper management of a multi-month calendar spread. I initiated the position in November with selling the Nov 40 call and buying the June 40 call. The stock price at that time was around $37 and I had a bullish bias. The stock has trended up and so far the Nov, Dec, and Feb calls that I sold all expired worthless. In Feb I increased my short strike to 41, and it closed just above $40 last Friday.

So now my long June 40 call is in the money, and I will probably look to sell a March 43 call.

My question is this – if my bias remains bullish, is the proper strategy to just keep holding the long June 40 call and keep selling short calls with higher strike prices, or is it smarter to just sell the June 40 call and initiate a new calendar at the 43 strike price (sell March 43/buy June 43)? In my studying of options I haven’t seen this topic discussed – but it seems to me that replacing the June 40 with the June 43 would lock in profit and reduce risk if the price goes down from here and is probably the smart move. Would there be any good reason to not do this? Thanks.


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Writing Calls Against LEAPS. Vega Risk

TradeKing webinar today, 5PM ET.

Adjusting Iron Condors Part I

Hi Mark,

OK I did my homework on the following scenario and I am

My original idea was to buy
LEAPS VLO Jan 15 @ 4.35 and short Sept 18 Call at .40. You said:
"The volatility is more than a consideration. This trade is very vega
sensitive and I believe that if you make this play repeatedly, your
results will be based on IV."

I compared the HV [MDW: Historical volatility] and IV and they are relatively close at this point. [MDW:That tells you that IV may be at a reasonable level, but does not describe potential risk.]

I ran the numbers with IV decreasing and it does affect LEAPS pricing.  However, doesn't that imply the stock price is more
stable because IV typically decreases on rallies?  [MDW: Not always.  IV does rise and fall for reasons other than how the market has been recently trading.  And IV for a single stock can easily get separated from 'market IV']

I went to the CBOE site and ran the numbers, but my more important question is
this: I purchased the 15 strike LEAPS.  Let's
go worse case to the upside and assume company is a takeover target @30.00, with the deal closing before my short options (Sep 18C) expire.

This is how I am viewing the trade:
My long 15 call is worth 15+ any time value. [MDW: There will be zero time value if the takeover is for cash]
My short 18s  cost 12 and the loss is $11.60.
Although not profitable at this time [MDW: 'at this time'?  There is no other time.  You will shortly have cash and no investment], my net cost for the investment is 3.95 (4.35 – 0.40)…

My cost at
this point is 3.40 (15-11.60) exposing me to a .55c loss  [MDW: This is not an accurate calculation.  Your cost remains $3.95, per the previous paragraph,  The position is now worth $3.00. That's a 0.95 loss]

[MDW:Please let me know what part of the trade I am missing.

Don, You are missing the fact that a 95-cent loss on a $3.95 investment is a very bad result.  A 24% loss is significant.

You used a single, low-priced stock, trading with a 33 IV and want to discover generic rules that apply to all situations.  You see the dollars lost as a number, and not as a percentage of the investment.  That's not reasonable.  Try this with AAPL and consider the results.

As we know there
is no reward without risk but I see the two risks: 1.
Stock sinks;  2. Dramatic upside
I am interested in hearing your thoughts. 

Yes, those are two of the risks.  Add another: an IV decline not related to a rally.

b) "Do you understand that by the time the stock hits 19, you are short
delta and continue to lose money on a continued rally?"

I don't get this
part and I am really trying to understand.  [The delta of your short option becomes higher than the delta of your long option.  Hence, you are net short delta and lose money on a price increase]

c) Look at the stock trading at 20. Drop IV by 25%. How does the trade
look now? How about 21 on the stock and IV down 50%?
I have not made any of these calculations. That's your assignment.  When
trading LEAPS, you want to know, not guess, what happens in a bunch of
'what if' scenarios.

OK, I did this hundreds of ways so that other readers and you can pick
apart my thinking:
I used 40% IV and then reduced it to 20% for VLO. 
I set up the trades as mentioned above.  [MDW: Don, The assignment was to help you decide if you really like this type of trade. My looking at the numbers does not help you develop a plan.

Is the risk/reward reasonable?  Can you make a wild stab at the potential reward?  What if IV declines and you must sell options @ 20 cents instead of 40 cents?]

[Don goes on to offer data, if you care to see the details, click here]

Thanks for reviewing this.  Hope I set it up in a way that makes sense.


Yes, it makes sense.  But the data is for you to review

The bottom line remains.  When you own LEAPS, a plan such as yours is not unique.  Many try this plan, and everyone who adopts it owns the LEAPS for a long time.  The price of that option is very susceptible to changes in IV because these options are rich in vega. 

The other factor that followers of this strategy ignore, is the possibility that the monthly income stream can be cut in half or worse, when IV drops or the stock price declines.

This strategy can prosper.  But it has more risk than you see. 


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Loving Positive Theta and Trading Calendar Spreads II

Part I

Follow-up: I did not mean to sound naive when I said that I don't care about short term movements.  I
tend to take a macro view of my positions.  I trade options just on
index options or index ETFs and I filter out the daily "noise."  I let the market ebb and flow and don't make too many

If the number of adjustments is sometimes > zero, then you are in the game.

I am conservative with the # of contracts so that a big market
swing is not going to cause much damage to the overall account.

Good. Position size is the #1 step when managing risk

In response to your comments about what would I do if the market
increases and my long put loses value: I would roll up my short position
to create a bull spread, presumably collecting enough premium to offset
the decline in the long position.

If I understand your plan correctly, the newly opened short put has a higher strike than your long put (hence you are now short a put spread). 
Roll too far and you suddenly have nightmarish downside risk.  Do you
really want (for example) to own a Dec 800 put against a Nov 850 put? 
How is that a calendar spread?

Be careful when adjusting. Do not own a new
position when that position has far more risk than you prefer.  It's
better to exit, take the loss, and begin again.

I would not allow my short position to get too far ahead of my long position so that the position became too risky.

That's the goal.  Not so easy to do when you want to 'roll up' the put
to recover enough cash to cover the loss from your long LEAPS put.

I did a 6-year back test of this strategy from 2004 – 2009 following this basic criteria:

1) buy 2-3 year Put ATM or slightly ITM.

This is a HUGE vega play, and to me, dwarfs your theta play.

[Side comment:  IV
skyrocketed during 2008-9.  If you  already owned your long-term put
before the IV rise, you fared far better than if you had to buy the put
when IV was near 90.  Consider the effect of this on the back test

2) sell 1 month ATM, allowing myself to roll up my short position each month so that I'm selling ATM. 

This ignores how far ITM or OTM your long option is.  Thus, it ignores
all Greeks. This may be a viable play, but it is NOT trading calendar
spreads. In a calendar, strikes are identical.  You are trading a
variety of diagonal spreads.

3) If the market declined to the point that I couldn't get $1 or so
rollover for each short put, I would close both legs and
re-establish the spread using ATM prices.  This happened during the 2008

both legs and opening a new ATM position during the crash means you had
to buy LEAPS puts when IV was HIGH.  All time record high (excluding
Oct 1987).  How could you convince yourself (in the real world, not in a
back test) to pay such a gigantic price for LEAPS puts?  How can anyone
anticipate a profit knowing that IV is going to decrease?

How can you earn a profit buying ATM puts in
a volatile market?  The strike you own soon becomes far OTM, reducing
the value of the time spread.

4)  As the market increased, I would increase my short strike price
to be ATM but would not let my short position to get more than 20
strikes ahead of my long position.

strikes?  20 SPY points is a 20% market move. Near the bottom it was > 20%.  

Please understand:  I find this far too
risky.  You may find it a great strategy, especially when you have back
tested it.  But know this:  This is not a calendar spread
This is not a theta play.  This is a play on vega. Plus, you are seldom
near delta neutral – and negative gamma continuously makes that worse. 

How can you own,
for example, a LEAPS 85 put and sell an ATM, front-month 100 put and
feel hedged?  You lose money on a big downside move and lose on a rally
with an IV crunch.

I must be missing something here.

This caps the risk.

The question becomes: Is that cap at an acceptable level, or is it too high? 

If the market increased substantially from my strikes, I would close both positions and re-establish.

Based on your comment, it seems to me that 'substantially' means more than 20 strikes.

you recognize that selling ATM options gives you the maximum + theta that you
seek, but that it comes with maximum negative gamma?  This is not a conservative

5)  I did one spread for every $2,500 of cash in the account,
thereby having enough cash on hand to handle adjustments and lower the
risk of the overall account.

see the possibility of losing half of that $2,500 overnight.  Obviously
that did not happen.  How big was the largest draw down?

This 6 year back test netted performance of approximately 25% per year.

Nice result. Do
you trust that period of time as being typical? 

Because I was satisfied with the back test, I started trading this
with real money in January of this year.  YTD, I am up almost 10%
compared to a down S&P 500.

Your benchmark is not the S&P.  Your trades have nothing whatsoever to do with market direction.

The important question for you: Is this return sufficient to justify the risk?  You may feel there is little risk, making this question easy to answer. Because nothing
terrible seems to have happened during very turbulent markets, the risk
may be less than I fear.

There is no reason to abandon a
successful strategy.  But be careful: Overconfidence can be a killer.

question remains:  Why are you making money?  It is truly from theta? 
Is it from vega?  Is it from lucky market moves?  Is it from making
skillful and timely adjustments?

This strategy is not a 'set it and forget it.'  Thus, it's important to know from whence come the profits.


Anyway, thanks again for your feedback.  I look forward to learning
more through your book which I just bought.



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Loving Positive Theta and Trading Calendar Spreads

Another good set of questions

1)  I am a big fan of calendar spreads because I like the idea of selling time value.

I'm sure you are aware, but other strategies allow time value to be sold, including covered all writing and credit spreads.

The definition of a calendar spread includes the requirement that both options have the same strike price.

All other variables of option prices are unpredictable, but the
passage of time is something you can count on.  Most books
describe calendars using calls, with the long position expiring only a few months after the short position.

It seems to me that using puts is more
advantageous: I can get more
for an OTM put than I can for an OTM call, therefore I'm selling more
time value.

You are also pay more for the long puts. 

An important decision: – Calendars perform poorly when the market
moves far away from the strike.  Thus, choosing OTM calls vs. puts
should be partially concerned with getting the strike price right.

Also, I have been buying LEAPS as my long position.  I look at my long put position as a life insurance policy,

That is NOT realistic.  No one hedges a life
insurance policy by selling short term policies against the main
policy.  If the market makes a gigantic move through your strike price,
you no longer have any insurance.

and I want the cheapest per month premium I
can get.  For example, this Jan I bought a Dec 2012 SPY 115 put
for approximately $19.  The cost of this insurance is just
over $.50 / month.  If I bought a 6-month put, the cost per month
would have been substantially higher.

I understand your plan.  But what are you going to do with that $19 put when the market moves much higher, IV gets crushed, and the put has declined to $8?

Am I missing something here?

You are
ignoring gamma risk – i.e., the BIG move.  Obviously calendars do best
when the market does not make a giant move.  But the market must remain sufficiently volatile such that IV
(implied volatility) doesn't decline by enough to destroy the
value of your LEAPS or severely diminish the price of the short-term puts – the options you sell every month.

This idea is so dependent on IV that it is really a vega play and not a theta play.  At least, that's how I see it.

So far, this strategy has proven to work pretty well,

Over what period of time?

but I'd be interested in hearing your opinions on using Puts and also using LEAPS.

are okay – but please evaluate how much extra you must pay for the LEAPS puts to determine whether this idea is truly better than using calls.

not for me – unless IV is very low.  Buying LEAPS options is a big play on
and future IV.

Question: Are you playing calendar spreads to play theta (as you said), or vega?  How much vega risk are you willing to take?  Only you can answer.


2)  My understanding is that
the Greeks help you understand short term movement in your overall
position.  If you set up a position with an eye towards the profit/loss
graph at expiration, the Greeks will only help you understand how your
position will react short-term.   When I set up a position, I'm not too concerned with short term movement, but only focus on the ultimate profit/loss potential….so if that's the case are the Greeks less important? 

IMHO, this is a naive and dangerous question.  Fortunes are made and lost before expiration arrives.

Greeks serve one purpose.  They allow you to measure risk.  Then, the trader accepts that
risk or reduces it.

My philosophy is that a
trader must avoid the big hit.  If you ignore
everything that happens between today and expiration, how can you avoid
that occasional big loss?

What if the
market rallies and your $19 put loses value day after day.  At what
point to do stop that bleeding?  Never?

If you plan to hold positions through expiration, regardless of risk during the interim
(I shudder at the thought, but understand it's your decision) I
believe the strategy is doomed to failure because the most important factor in your future success is how well you manage risk.

Take the gambling aspect out of the equation.  I recommend considering position risk, defining your comfort zone, and trading accordingly.  That is risk management.


3)  Finally, another question about the Greeks:  I understand Delta, Theta and to a lesser extent, Vega. 

Nutshell version:  When IV increases by one point, option prices increase by their
vega.  The more vega you own, the better you do when IV increases.

But I have a lot of trouble wrapping my mind
around Gamma.  I know the definition that it measures the change in
Delta, but how does one use Gamma to structure a position? 

It measures the rate at which delta changes. If
you are selling gamma – and you are – you want to know how much money
you anticipate losing if the underlying moves X points.

Let's say you lose $1,000
on a two point move (delta ~ -500).  Then lose $1,200 on the next
two points (delta ~ -600) and $1,500 on the next two (delta ~ -750).  If the rate at which those
losses are accelerating is too high – if the risk is outside your zone – then you are short too much gamma. 
'Structure' your trade differently.

One way to do that is to
reduce position size.  Trade 10 or 20% fewer spreads. 

Or own some
protection (buy something useful (not father OTM than your short option)
that has + gamma, even though it is going to cost some of that precious
time decay).  Even a 1-lot pays dividends on a large move.

The point is to be aware of gamma, decide if it's too high, and adjust the trade accordingly.

I need to continue studying Gamma. 

replying to questions such as you raised, it's very helpful to have an
idea how long you have been using options.  I'm sure you can see that my
reply to a brand new option trader would not be the same when the
questioner has been trading for 5 years.  If you are a 5-year trader,
I's a bad idea to not know more about the Greeks.

If new to
options, I'd encourage you to spend some time in learning to understand what the Greeks
can do for you (even though it is only to measure risk; this is

For example, Delta is easy to remember
because it's always positive for Calls, negative for Puts.  How Gamma
works is not as intuitive as the other Greeks.  I will continue my
reading on this area.

Gamma is the same for the
put and the call (same strike and expiry).  Gamma is always +.  If you
own the option, you get + gamma.  If you sell it, you accumulate negative

Vega is always +.  All options increase in value when the
implied volatility rises.  Own an option, you have + vega.  Sell it,
negative vega.

Same with theta.  All options decay.  Options have negative theta.  Sell the option, and you have + theta.  Own it and it's negative.

Tomorrow, a follow-up conversation.  To be continued


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Stock Trader Moving into Options

Hi Mark,

I am a longtime stock trader, but over the past couple months, I have taken a real liking to the options game. Your blog has been a huge help in understanding many of the aspects I've been reading about.

So I was wondering a couple things:

1. I notice you trade RUT. What it is about this index that draws you to it? And a more general question is, what do you look for in a stock or index for IC/credit spread trades?

2. What are your thoughts on a strangle comprised of an out-of-the-money call spread and an out-of-the-money put spread, both bought in large lots at low delta, say .20-.25 per spread, both puts and calls? 

[See reply for comment on the word 'delta'.  It should be 'cost']

As long as I am confident of movement in the life of the options, one of the spreads will pay for the other, especially if one moves ITM… If the stock tends to swing, both sides can be closed for a nice profit.

Today's (Jul 16, 2010) hammering of the financial sector and the market in general, has made this very tempting, especially ahead of earnings.

I also own a 25 lot, low delta Jan 11 VXX call spread to hedge my portfolio, and it seems to be working okay as the spread moved from .70 to .85-.90. Is there anything I'm overlooking with this strategy?

I have not seen much advice online about using debit spreads to put on a strangle position, so I get the impression it is not used by many traders.

[Once again, 'strangle' is not the term you want to use]

My thought process is that buying a spread with ~ 25 delta and selling for $0.40 or .50 is like buying a $25 stock (albeit one that expires) and having it rally to $40 or $50, even though the underlying stock is only moving a dollar or two.

3. I am currently long PG Oct 60 calls. I paid ~ 2.50 on a market dip and when PG rallied three points, I sold Aug 60 calls for ~ 2.50 and plan to take advantage of time decay and exit both as a calendar spread. I may get a chance to buy to close the Aug 60 calls for a song, and still be long my Oct 60 calls.

Good move or is there something I'm overlooking? I am slightly worried that someone will exercise the August calls for the upcoming dividend, and am tempted to take my profit on the spread if there is a high risk of that.

Any advice or critiques would be most welcome. At this stage, my comfort zone is being long either naked options (giving me the option to leg into an instantly profitable debit spread, or sell to close) or debit spreads.



Welcome to the options world Andy. 

1) Regarding RUT: I prefer to trade European style options because they settle in cash.  I'd prefer SPX options, but trading those is inefficient for me.  

I don't trade stocks.  My requirement would be 'plenty of strikes' – and that eliminates all mid-priced stocks


2) I must
correct an error in terminology.  We must speak the same
language to communicate.

You are writing about low cost spreads, not low delta spreads. [Delta is the rate at which an option's price changes when the underlying stock moves one point].  Spreads can have 'low delta' but I see from your continuation that you are referring to spreads that are low priced.

Correct: If you get a big enough move and if you get it quickly enough, you can earn a nice profit.
To get a profit from both sides, you need a pretty good-sized swing. Plus, you must have a good knack for exiting one side at an opportune time. Double profit is a rare bonus.  Don't think about it. The game is to win on one side.

I have nothing against that strategy in principle. However, I take exactly the opposite position in my trading.

I sell those credit spreads (that's an iron condor position, not a strangle) and hope to profit from lack of movement, time passage, or shrinkage in implied volatility. In reality we can both win when taking opposite sides of the same trade – depending on how adjustments are handled and on our timing of trades.  However, I obviously prefer my side to yours – but I am NOT suggesting that you change.  You are okay preferring your side.  Our results depend on how well we handle position risk.

I am not paying enough attention to VIX and VXX to give a good answer and don't want to say the wrong thing. But VXX is much better to trade than VIX. In addition, you have it right. A down market should result in an increase in the implied volatility of the options, and that moves VXX higher.  When VXX is higher, your spread should gain value.

You have not seen much advice online about 'using debit spreads to put on a strangle.' That's because you have the terminology wrong (no big deal).

A strangle consists of naked options (long or short), not spreads. The position you are describing is the iron condor, and not a strangle. The iron condor is VERY popular.

Buying a spread @ $0.25 and selling @ $0.40 is similar to trading penny stocks and paying 25 cents and selling at 40 cents.  It's not like a $25 stock and a $40 stock.

3. Your PG plan is viable.

But you must know this: calendar spreads get narrower (lose money) when the stock runs away from the strike price in either direction.

In my opinion, it's easier to take your profit by selling the Oct option, but selling the August call does give you a position with the opportunity (that's all it is) to earn extra profit.

I suggest you consider an alternative when you own a profitable trade.

First, do you still want to remain long this option at the current price level for the stock? If no, sell the option, take your larger profit and move on. If yes, then it's okay to do as you suggest and find a hedge.

But know this: You are not locking in an instant profit. This is a common misconception.

You are taking your own personal money, the profit you already earned, and reinvesting it into the call spread – when you could have sold and kept the entire profit. When you exit, the cash belongs to no one but you (and the IRS).

When you hedge the trade – even at a wonderful price – you do not have an INSTANT PROFIT.  You earned that profit.  So decide:

  • Sell and take the money
  • Reinvest part of it into a a new, hedged trade

In other words, do as you suggest – ONLY when you believe the new position (in this case a calendar spread) is the place to invest your cash.

Enjoy your options.


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Wide Calendar Spreads

It seems to be a very attractive strategy: Buy an option that expires months in the future and then write calls against that option – and collect a new premium every month.  Many beginners think of this as similar to writing covered calls month after month.

But, it's not similar.


Hello Mark.

I am just beginning to learn about options and overheard someone say "Buy longer term options and sell shorter-term options against it". Could you please explain this strategy and tell me why/when someone would use it?

Is this a conservative strategy?



Hello Harrison,

This is a strategy favored by some traders. Personally, I don't use it and prefer alternatives. But please understand: each of us should use strategies that make us feel comfortable. There is nothing inherently wrong with this idea.

Note: I do not consider this to be a conservative strategy.


1) Time decay. Longer-term options have a smaller theta (rate at which option loses value as one day passes). That means the position you describe is expected to make a small amount of money every day, all things being equal (which they seldom are).

2) Repeatability.  If the short-term option expires worthless, or is repurchased at a small price ($0.05 or $0.10 for example), then you still own your long-term option and can sell a new, short-term option against it. If you can repeat this trade several times (once per month), by the time your long-term option becomes the front-month option (and time to sell it) you will have collected much more in time premium than you paid. And that makes the trade profitable. This is the ideal situation.


Price movement.

1) When the stock moves much lower and you have a call spread (or higher and you own a put spread), the value of your long-term option declines by far more than you collected when selling the front-month call.

Thus, at the first expiration, you are already losing money. You must now sell another option against your long option. Which strike price do you sell? If you own a call with a 60 strike price and the stock is down to 52, do you sell the 55 call – risking a move to the upside? Do you sell the 60 call, which will be a low-priced option and give you little chance to make much money – unless the stock rallies back towards 60. This is a problem.

2) If the stock rallies to 70 instead of falling, the spread loses money because the price of the near-term option increases more rapidly than the price of your longer-term option. When you buy back your short-term call (when expiration arrives), you must decide which option to sell next. If you sell another call with a strike of 60, it will have little time premium and your chance for making money is going to depend on the stock price falling back towards 60.

If, instead, you choose to sell a call with a 70 strike price (in other words, an at-the-money call), you have a chance to make some decent money and recover the loss. But, if the stock price declines back to 60, you are worse off than when you started (because you paid far more to buy back the 60 call at the previous expiration than you collected for the recently written 70 call).

Bottom line

You have good time decay with the position.

You have negative gamma, and any decent-sized move is going to take away your profits.

Any time spread has the same properties, but when you own a long-term option, the risk and reward are both magnified. 

Calendar spreads with only one month separating the expiration dates is far more conservative – and in that respect is very different from the spread you describe.

This Q&A first appeared at, 1/1/2010


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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.


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