Long Put Calendar Spread Options Strategy Explained

A long put calendar spread consists of a short put option in a near-dated expiration and a long put option in a further-dated expiration at the same strike spanning two expiration dates. Since further-dated options are more expensive than near-dated options due to heightened extrinsic value, calendar spreads result in a net debit when established.

A put calendar spread can appreciate when the price of the underlying it tracks decreases and approaches your put option's strike price, especially if that happens when the short put is about to expire. A decrease in the stock price can also reflect heightened uncertainty if the drop is sharp, so put calendar spreads can benefit from increased volatility since long options strategies also provide exposure to implied volatility through Vega exposure.

However, calendars also suffer from time decay, like any other long options strategy. The value of the calendar spread may depreciate over time when the value of the underlying it tracks rises or remains constant and does not approach the long put calendar's strike price. As a result, the underlying price must drop quickly toward the put calendar's strike price to compensate for any lost value due to time decay.

Expiration Risk for Long Put Calendar Spreads

Since a long put calendar spread has a short put component that expires before the long put option, there are early assignment risks just like any other short option strategy. With that said, the long put option offsets the intrinsic value risk at the short put strike. Still, buying power and the position itself can change if the short put is assigned early in a long put calendar spread, even though the risk stays the same when the long put is still active.

Options that expire ITM by $0.01 or more are auto-exercised, resulting in an assignment of 100 long shares of stock for each ITM short put. Any options strategy involving short options, including a naked short put, may face after-hours risk on the day of expiration. In summary, although the short put may have expired OTM based on the stock's closing print, an OTM short put option can become ITM based on any extreme downward price movement after the market close, resulting in an unexpected assignment of long shares. The only way to eliminate after-hours risk is by closing any short options positions before expiration.

It is crucial to have a plan, like closing or rolling the position before expiration, if assignment is not part of your strategy. Please visit the tastytrade Help Center to learn more about expiration risk, including more about pin risk and after-hours risk.

Long put calendars can be profitable as the underlying approaches the strike price of the spread. Peak profitability may occur when the underlying falls to the strike price near or at the expiration of the short put option, resulting in max profit in the short put, and retaining the most extrinsic value in the long option that is now near the stock price. Calculating the max profit of a long calendar spread is impossible since the short put leg expires before the long put leg, and the long put leg will still have some amount of extrinsic value remaining.

The max loss for the spread is the debit paid and can occur when both legs expire OTM and are worthless. The profit and loss graph below assumes a scenario where both legs are still active and have not yet expired. If you get assigned on the short put and hold stock, the max loss is the stock going to zero but if the long put hasn’t expired, then it will offset the loss on the shares as the active long put offsets intrinsic value risk in 100 shares of stock below the put strike price.

A long put calendar spread consists of two legs:

• A long put option in a further-dated expiration
• A short put option in a near-dated expiration

XYZ currently trading @ $45 in February

• Buy to open +1 XYZ June 40-strike call @ $7 debit
• Sell to open -1 XYZ March 40-strike call @ $2 credit

Cost: $5 debit ($500 total)

1. Enter a symbol.
2. Navigate to the Trade tab.
3. Go to the Table mode.
4. Click the Strategy menu.
5. Locate the Calendar strategy and (from left to right) click each column to display Long, Put, and Go.
6. The short leg will display in a red bar and in a near-dated expiration. Drag the bar up or down to adjust the strike.
7. The long leg will display in a green bar and in a far-dated expiration. Drag the bar up or down to match the short leg strike.
8. Go to the order ticket to determine the quantity, price, time-in-force (TIF), etc., before clicking Review and Send. Review the order thoroughly including commissions and fees, then send the order.