A put calendar spread — sometimes called a horizontal spread — is a trading strategy that looks to take advantage of the changing prices of two put options with different expiry dates. When buying a put calendar spread, a trader will simultaneously buy longer-term puts and sell the same quantity of nearer-term contracts with the same strike price. Conversely, a trader will sell the longer-dated put and buy the nearer when selling the same spread. Options’ mark prices typically reduce faster as their expiry approaches, presenting an opportunity to profit with less risk than a directional trade.
This put calendar spread guide will introduce the strategy and explain scenarios where using it might be profitable. After discussing horizontal spread risks, we show you how to trade them across OKX’s products. Let’s go!
What is a put calendar spread?
Before continuing with this guide or implementing a put calendar spread, it’s essential to understand how options trading works. You can learn more about options contracts in this dedicated guide.
Put calendar spreads involve the buying and selling of put options with the same strike price and underlying asset in equal amounts at the same time. Crucially, the two put options must have different expiry dates.
Buying a put calendar spread requires the trader to buy a longer-dated put and sell a nearer-term contract. Conversely, a trader must sell a longer-dated contract and buy a nearer one to sell the spread. Since the trader is taking equally sized, opposite positions, the strategy is “market neutral.”
The trader will pay the mark price for the long (bought) put and receive the mark price for the short (sold) contract. The difference is the total cost to enter the trade, referred to as the position’s “debit.”
The concept of “time decay” creates the potential for profit in put calendar spreads. Options contract’s mark prices are influenced by the amount of time remaining before expiry. A contract expiring sooner will typically have a lower mark price than a longer-dated contract. This is because there is more time for the underlying asset’s price to move such that the contract expires in the money.
As an out-of-the-money contract’s expiry draws near, its mark price reduces because the chance it will be exercised also reduces. When buying a put calendar spread, the underlying’s spot price will ideally be at or above the strike price at the near-term expiry. When this is the case, the contract expires worthless, and the trader can choose to sell the longer-term contract or leave it open, potentially resulting in a profit. When selling a put calendar spread, the opposite is true.
We’ve listed the key characteristics of a put calendar spread below:
- Must comprise two legs only, and both must be put options
- Each put must be for the same underlying asset with the same strike price
- Legs must be opposite (i.e., buying one put and selling the other)
- Put calendar spreads are market neutral
- Both puts must have a different expiry date
- The quantity traded in each leg must be identical
Examples of put calendar spreads
To appreciate how a put calendar spread works, let’s consider the following example and how different underlying price action impacts the strategy’s profitability.
The spot ETH price is 1,000 USDT in early September. The trader buys an Oct. 14 ETH put with a 1,000 USDT strike price, for a mark price of 25 USDT. Simultaneously, they sell a Sept. 14 ETH put contract with the same 1,000 USDT strike price for 10 USDT.
Our trader received 10 USDT for selling the near-term put and spent 25 USDT on the longer-term contract. Therefore, entering the trade cost them the difference between the two contracts, which is 15 USDT.
Scenario 1
On Sept. 14, the ETH spot price is now 750 USDT. The Sept. 14 put expires in the money because its buyer can exercise it to sell ETH at 250 USDT above the current spot price. Meanwhile, the Oct. 14 put will likely be worth more than its original mark price because the ETH price could continue to drop, giving it an even greater intrinsic value at expiration.
The trader will lose 250 USDT to settle the near-term contract but can likely immediately sell the Oct. 14 put for more because of the chances of a further decline in the ETH price, putting it further into the money. Let’s say its current mark price is 300 USDT.
If the trader sells the October put immediately, their profit will be the difference between the cost to close both positions (50 USDT) minus the original debit (15 USDT). Therefore, their overall profit will be 35 USDT.
Alternatively, the trader can leave the Oct. 14 put open in the hope that the ETH price continues to fall, further increasing its mark price. However, the ETH price could reverse such that the longer-term put expires worthless. In this case, the trader would lose the original debit plus the cost to settle the near-term contract. In our example, the trader’s overall loss would be 265 USDT.
Scenario 2
On Sept. 14, the ETH spot price is 1,250 USDT. Since there is no value in exercising the right to sell ETH at 250 USDT below the market price, the Sept. 14 put would expire worthless. However, the longer-term contract might still have some value since there is a chance that the ETH price could reverse over the next month.
The trader can close the position by selling the Oct. 14 put. If they do, their overall profit or loss will be the debit plus whatever price they sell the longer-term contract. Therefore, their maximum loss would still be the 15 USDT spent to open the position. They also might make money on the trade because the ETH price could drop so much that the contract becomes worth more than the 15 USDT debit. Again, they can leave the longer-term contract open but risk increasing their loss further.
Scenario 3
On Sept. 14, ETH is trading at 1,000 USDT. The trader’s September put expires worthless because there is nothing to gain by exercising a contract to sell ETH at the current market price. Meanwhile, there is a strong chance that the Oct. 14 put will have a higher mark price because, over the next month, the ETH price could drop such that the contract is now in the money. Let’s say that the October contract is currently trading at 100 USDT.
If the trader closes the Oct. 14 position immediately at the near-term contract’s expiry, their profit will be 85 USDT (100 USDT minus the original 15 USDT debit). They could also leave the position open, potentially resulting in an even greater profit should the ETH price drop before the October expiry. In doing so, their maximum loss would still be limited to the debit alone.
Why trade a horizontal put spread?
Traders like put spreads because they offer an opportunity to profit from price moves with limited risk compared to simply taking a directional position in a market. Additionally, it is a risk-defined strategy, meaning that the trader knows exactly what their potential loss is when entering the trade. If the trader opts to exit the longer-dated contract at the front-month expiry, their maximum loss is limited to the cost of the debit only.
As with a call calendar spread, the put calendar spread’s potential profit is far greater than the possible loss. If the underlying’s spot price moves up by the front-month expiry and down again by the back-month expiry, the trade can be closed for an attractive gain.
Put calendar spreads can also be profitable when the market doesn’t move at all. The price decay of a longer-dated options contract relative to a shorter-term one means that the back-month put will often retain value even if the front-month contract expires worthless.
Additionally, traders might implement a put calendar spread during a relatively low price volatility period in an asset that typically experiences significant price moves. When entering the spread, the lack of price volatility will likely mean that the debit paid is small, meaning the total risk is low.
If volatility picks up again, which it often does in markets like those of cryptocurrencies, there is a high chance that the back-month contract’s mark price will be much greater than it was at the time of entry. This is because buyers are willing to pay more for a put that could be well into the money by its expiry, and sellers demand more for the risk they are taking on.
Put calendar spread risks
As mentioned, put calendar spreads limit risk by their nature. Since opposite positions are taken simultaneously, a move in the underlying to the upside or downside has little impact on the overall position. If one contract moves out of the money, the other will move into the money.
That said, there are some situations where a put spread can become a much higher-risk trade. If the trader decides not to close the trade at the front-month expiry, they risk their back-month contract expiring worthless, meaning they cannot recoup losses from the front-month contract — i.e., if the back-month contract expires worthless, they won’t regain anything to offset losses from the front-month put.
Let’s consider the above example again. Our front- and back-month contracts both have a 1,000 USDT strike. ETH price tanks to just 100 USDT by the Sept. 14 expiry. Of course, the put our trader sold is well in the money, and its holder exercises it. Our trader is now an additional 900 USDT down on top of the debit to enter the positions.
Instead of immediately selling the back-month put, our trader holds it. ETH price rallies again to above 1,000 USDT. The second contract expires worthless by its Oct. 14 expiry, and our trader has realized a much more significant loss than the 15 USDT debit.
A further danger when trading any multi-leg strategy is execution risk. The strategy is only risk-defined if both positions fill entirely. If one leg fills and the other doesn’t, the trader is exposed to the risk that the market moves against their open position, resulting in losses that the unfilled leg should have offset. This is particularly risky when selling options contracts, as the put calendar spread strategy requires.
Some trading venues offer sophisticated order types to mitigate execution risk when entering multi-leg positions. At OKX, for example, we not only offer advanced order types but also provide a powerful block trading platform to help traders execute larger trades while mitigating execution risk.
Trading put calendar spreads on OKX
OKX offers various features and tools to help traders enter different multi-leg strategies, including put calendar spreads. We’ll be adding more soon and will keep updating this guide with every opportunity to trade put calendar spreads as we add new functions.
Traders can enter put calendar spreads manually on OKX, too. However, we don’t recommend inexperienced users attempt it. Execution risk can expose a trader to the same risk that entering the multi-leg trade was supposed to mitigate. Instead, we recommend using a feature designed specifically for trading advanced options strategies.
Block trading
OKX offers a cutting-edge block trading platform that comes loaded with various predefined strategies. By placing both trades simultaneously, you can completely avoid execution risk.
You can check this extensive guide to familiarize yourself with block trading. We recommend those that have never used the platform before to start there.
When you’re ready to make your first put calendar spread via our block trading feature, follow the steps below.
First, select the underlying crypto you want to trade using the menu highlighted below. Then, click Calendar and then Put Calendar Spread.
Two put option trade legs will appear in the RFQ Builder. First, select each leg’s strike price and expiry date. Then, enter the total trade amount, and use the green B and red S buttons to choose which leg you want to buy and which you will sell.
For this example, we’ll request quotes for the BTCUSD 221230 Put, and the BTCUSD 220826 Put. Both strike prices are $20,000, and we’re buying the spread.
Select which counterparties you want to trade with by clicking All and check all the trade details entered.
When you’re ready to send the requests, click Send RFQ.
You’ll arrive at the RFQ Board, where quotations from the chosen counterparties appear. The figures under the “Bid” and “Ask” columns are the prices offered for buying and selling each instrument. You’ll also see other important information, such as the creation time, time remaining before quotes expire, the status and quantity of each leg, and the counterparty quoting.
To buy the spread, click Buy and to sell the spread, click Sell.
On the order confirmation window, check your details once more. Then, click either Confirm Buy or Confirm Sell. You can also return to the RFQ Builder or RFQ Board by clicking Cancel.
After clicking Confirm Buy or Confirm Sell, both legs will fully fill simultaneously. Therefore, you needn’t worry about execution risk when using block trading on OKX.
After finishing your trade, it will appear at the bottom of the RFQ Board in the “History” section, where it will remain for one week. After seven days, it will disappear, but you can recheck it later by clicking view more.
As a multi-leg trading strategy, a put calendar spread requires action on your behalf to ensure that it remains market neutral. At the near-term contract’s expiry, you might want to close the longer-term position and can do so in the trade history in the “Margin Trading” section. You can then close either position with a limit or market order.
Mitigate risk and profit from put calendar spreads on OKX
A put calendar spread is a popular trading strategy because it enables traders to define their position’s risk while potentially enjoying relatively large gains. The strategy works because of known characteristics of options contracts, namely their relative price decay as expiry approaches.
When a put calendar spread is managed responsibly, its downside risk is limited to the position’s debit, which can be especially low when the trade is entered during a period of low market volatility. The strategy is also attractive because it can result in profitable opportunities when an asset’s price doesn’t move at all.
Thanks to tools like our block trading platform, multi-leg options trades can be easy to execute and free from execution risk on OKX. When deployed via an automated system, such strategies become a powerful weapon in any serious crypto trader’s arsenal. Game on!
Source: https://www.okx.com/academy/en/put-calendar-spread-explained