Put Calendar

Posted in Finance, Accounting and Economics Terms, Total Reads: 349
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Definition: Put Calendar

Put Calendar is an option trading strategy in which an investor goes long on a long dated put option and goes short on a short dated put option. The actual bet is on the volatility of price movement.

 

Description:

Usually, an individual executes “put calendar” by going long and short on an option of the same strike, but of different maturities. The idea is to buy an option where price decays are slower (longer maturity – Θlosses are less) and sell an option where price decays are faster (shorter maturity – Θlosses are more). Based on the differential in price decays and premiums, the investor makes money.

 

Example:

Investor X goes long on put of strike $100 and maturity 100 days

Investor X goes short on put of strike $100 and maturity 50 days

 

The investor would make money when the stock price rises or remains neutral (bullish/neutral outlook) in the short term and lowers in the long term (bearish outlook). Thus the investor is betting on the volatility of price movement.

 

When the strategy is employed with options at same strike prices, it is termed a “horizontal spread”. However, the same strategy can be carried out with different strike prices also and such a strategy is termed “diagonal spread”.

 

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