What is a long calendar spread with puts?
A long calendar spread with puts is initiated by selling a put option that expires soon and buying a put option that expires later. The wrinkle is that both of these options have the same strike price. Entering a long calendar with puts will require the trader to pay a debit.
This strategy will be profitable if the stock price stays at or above the strike price of the short put option before it expires, and then falls below the strike price of the long put option that you bought later on. This would ideally happen when volatility is increasing.
When to use a long calendar spread with puts strategy
When an investor thinks that the stock price will be more or less stable in the short term, entering a long calendar spread with puts is a trade that can make sense. A long calendar spread with call options usually expresses a less neutral outlook than a long calendar spread with put options because of the greater time value inherent in call options.
If your outlook tends more bearish than neutral, then it makes sense to compose your long calendar spread with puts from options whose strike prices are far out-of-the-money.
How to manage a long calendar spread with puts position
Time decay has a beneficial effect on long calendar spreads with puts. The closer it gets to expiration, the faster the front-month put option will lose value compared to the back-month put option. If the stock price is above the short put, the option will expire worthless. The long put option will be out-of-the-money and have time value remaining.
If you want to make money from your position, it's better if the implied volatility increases at a time close to when the front-month contract expires. This will increase the value of the back-month put, while having little effect on the price of the front-month put.
Long calendar spread with puts maximum profit potential
The maximum profit for a long calendar spread with puts is limited to the amount of money received for selling the back-month put option minus the cost to buy back the front-month put option, minus the net amount paid when establishing the position.
Long calendar spread with puts maximum loss potential
If you enter a long calendar spread with puts, you can only lose the net debit you paid to set up the trade.