Question about Calendar Spread

Discussion in 'Options' started by torontoman, Oct 7, 2009.

  1. I am new to calendar spreads and I am learning.

    I recently bought March 96 puts to hedge my SPY position. I am comfortable with this position as it is insurance on keeping some of my profits from the run up. My goal is to eventually be only half hedged.

    Question: What can happen to me if I sold the October 96 puts if the market decreases sharply?

    Thanks in advance.
  2. Hester


    This is called a diagonal calendar spread. Its something I like to do. Since that front month option your short has greater and increasing theta, it makes sense to go short a front month and long a back month. If and when the front month expires just write a new one. Great way to take advantage of theta and lower the cost of your longer-term option.

    Input that into an option p/l tool and you'll see what you can make or lose depending on market outcome.
    If the market tanks then your long march puts will be assigned to your short october puts for a loss. Just monitor the position and if spy declines and gets close or passes that 96 level close your total position to avoid future loss. Spy won't fall below before october expiration though. Thats a huge loss and not enough time.
  3. MTE


    Actually, it's a calendar not a diagonal calendar since the strikes are the same.

    A calendar is a relatively cheap way to hedge a stock position, but it hedges you only within a certain range around the 96 strike. If the market falls through it then a calendar would have a loss as would your stock.
  4. Thanks for answering
  5. As others have mentioned, selling the Oct 96 puts would create a calendar spread.

    I don't think it would be a good idea since with October expiration next week, you wouldn't get much time premium unless the drop was close to the strike and SOON. In addition, your SPY position would no longer be hedged well.
  6. Thanks spindr. You have a good point.
  7. Hester


    Yea you guys are right. Its a horizontal calendar spread. I miss read the post. My bad. Sorry If i confused any one.