At The Money (OTM) Long Put Calendar Spread

At-The-Money (ATM) Long Put Calendar Trading Setup (Strategy)

Below you'll find full details on the ATM Long Put Calendar Setup.  At OptionAutomator we use the terminology "Options Setup" vs. "Option Strategy" as you may see elsewhere.  Why the change in terminology?  We believe that an options strategy is more than just selecting combinations of puts and calls.

This is a great setup for traders who are neutral or undecided in the direction of the stock and look to have time decay and volatility expansion working on their side.

At The Money (ATM) Put Calendar
You create the at the money (ATM) put calendar spread setup with the combination of these two options:
  1. Selling (writing, short) a near-term put at the money (where strike price and stock price are equal or close to equal) with a short expiration typically less than 30 days and,
  2. purchasing (holding, long) a later-expiring put with the same strike price as step 1 above. This position creates a net debit that you will pay upon trade entry.
When establishing an at the money (ATM) put calendar spread, the legs of the spread are created by zeroing in on a stock that is neutral to slightly bearish and expected to stay near expiring put. The position benefits from time decay as the puts have time value with no intrinsic value (since they are bought and sold at the money). It is a calendar or time spread because the strike prices of the sold put (sold with the near expiration) and the purchased later-expiring put share the same strike price. The trader looks to profit from decay of the short put while simultaneously covering their risk of the stock moving significantly lower by purchasing the longer-dated put.
You will break-even when the amount of debit that you spend at trade entry is recovered. In the case of this type of setup, you want the short put to lose value faster than the long put.  This is normal behavior so long as the price of the underlying stock or ETF remains close to the strike price of the two put options.
With this setup you want to avoid sharp movements downward or upward in the underlying stock.  The long put protects the short put in the short term should a sharp decline occur in the price of the stock to limit the losses to the initial debit paid for the position.
The maximum potential gain from this setup is realized if the stock is $0.01 above the strike at the first expiration. The profit zone of such a position is much wider but will be less than the maximum gain.  It is possible to continue to hold the long put position after the short put expires for even more gains, but usually, we close the position (buy back the short put and sell the long put) in our own trading when we realize 10-20% of the max profit.
The maximum potential loss from this position is the net premium paid when the trade was established.  As with all long calendar spreads, these positions are considered defined-risk trades.
The broker will debit your account when you enter the position.  As your maximum loss is defined by the debit paid at trade entry, the broker will not require any additional margin requirement to hold this position.
The position will benefit from time-decay since the underlying is sufficiently close to the strike price you chose (thus the name at the money calendar).  As time decay increases exponentially as the option approaches expiration, it is the intent of this position to see greater time decay in the short option than we see in the long option.  
The implied volatility (IV) or the sensitivity to changes in the price of the underlying stock over time, is beneficial to this position as IV impacts pricing proportionally to the days left in the contract to experience the increased volatility.  In general, we like to put on these positions when IV is low and we expect volatility to expand.
Good options traders will use ATM Put Calendars frequently when IV is low and the stock seems to be consolidating at new pricing levels after a slow steady gain up.  They are great positions to profit from a ‘boring’ market and suitable for beginner traders as the risk is fully defined at trade entry.   Key advantages include:
  1. Allows the trader to benefit from time decay and play volatility expansion all while maintaining defined risk.
  2. A sharp upward movement in the price will increase the IV, making recovery of the net debit easier through a natural hedge.
  3. Many times these positions are put one when a stock is lightly trending.  If the correction back to the short put is sudden the profit both from time and IV expansion.
  4. Downward movement of the stock’s price after the expiration of the short put will work in favor of the long put.

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