January 2, 2012 9:53 pm

Weekly Options Strategies: Calendar Put

 
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People trading weekly options are always looking for weekly options strategies to trade with, but how does one chose a strategy based upon market trend? In a bearish market, the calendar put is an option spread that would be good for any trader to learn.

Similar to a covered call (if one could trade these that way) the calendar put is a nice option strategy. As with the calendar call, a long term put option is being bought here instead of the stock. The calendar put has a low initial investment which is attractive and using weekly options, this strategy can increase the maximum yield trough the life of the trade greatly!

The calendar put option Strategy involves buying one put option (OTM) and further out on the calendar.  Each put option are usually bought at the same strike price. Then, using weekly 0ptions you sell the same strike price option on a weekly basis. This creates a nice income stream and if done correctly can also yield a nice profit.

You make money as the stock remains below strike price of the weekly option you sold, the Put will expire worthless and you keep the premiums. You can then sell another put option the following week.

With this strategy, what happens if  your option trade does not go your way you want it to because the stock rose above the strike price? The trade needs to be unraveled. It is not hard to do. If the weekly option that was originally sold is exercised, all you have to do is sell the long put option originally bought (hopefully at a profit), use the proceeds to buy the stock and turn right around and deliver it at strike price. You should profit from the premium of the weekly option sold, and the uplift in value of the longer term option bought.

You create a very nice weekly income against a longer term position while the market trend is neutral to bearish. Your risk is limited to the cost of your original investment in the long call (minus the profits from sales of shorter term weekly options). Your profit will be the premium from the weekly options sold (minus the debit of your original investment).

Time decay is your friend here and can work to one’s advantage in this type of trade, but timing is important. Obviously time decay will end the life of a weekly option but the timely unraveling of the option strategy is important also. One’s original investment in a long term option will also be susceptible to time decay. So if you are looking for maximum profits, the original option needs to be sold in a timely manor also to maximize on its value.

When you start to put this trade together, if the stock is more neutral, buying closer to (at the money- ATM) long term is a good strategy. If the stock is bearish, a little further (ATM) would be preferable.

Example:

  •      The SPY is trading at 118.22.
  •      Let’s say you buy a September Quarterly that expires September 30th with a strike price of 115, the cost is $3.05.
  •      So you start out with a debit of $3.05 in your trade.
  •      This gives you four trading weeks to sell the 115 Weekly Put Option
  •      Presently it is trading at $1.21.

You cannot completely project the value of each weekly option, but if the SPY remained range-bound for that period, you would sell three weekly options for $1.21, ($1.21 x 3)= $3.63

Then, sell the original quarterly option that may have decreased in value now to about $1.20.

Your income ($3.63 + $1.20)= $4.83

Subtract this from your debit and you have your profit potential. ($4.83 – $3.05)= $1.78 profit potential for the trade.

A calendar put is a great way for you to generate a monthly income profiting from range-bound or slightly bearish leaning stocks.

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