Short Calendar Put Spread

The short calendar put spread is used to try and profit when you are expecting a security to move significantly in price, but it isn't clear on which direction it will move in. This makes it a volatile strategy; you use it when your outlook is volatile.

There are, in fact, two variations of this strategy; the short horizontal calendar put spread and the short diagonal calendar put spread. The former is the more frequently used of the two and that's the variation we have covered in this article, along with a brief explanation of the latter. For further information, please see below.

Key Points

  • Volatile Strategy
  • Not Suitable for Beginners
  • Two Transactions (buy puts and write puts)
  • Credit Spread (upfront credit received)
  • Medium Trading Level Required
  • Also known as – Short Put Calendar Spread, Short Time Put Spread

When to Apply a Short Calendar Put Spread?

The short calendar put spread is a strategy that can be used when you have forecasted that a security will move sharply in price, but you aren't able to clearly determine in which direction the price will move. You might want to use it shortly before a publically listed company makes an earnings announcement or if a company is about to release details of a new product or service.

Such events will very often result in big price movements, but it can be difficult to know whether the effect will be positive or negative. Using this strategy spread removes the need to decide whether the price will go up or down, because it will return a profit either way as long as the movement is big enough.

Establishing a Short Calendar Put Spread

There are only two transactions required to establish a short calendar put spread. You must buy at the money puts and also write at the money puts. Because this strategy is a calendar spread, the two sets of options must have different expiration dates. You need to buy contracts that have a short term expiry date and write the same amount of contracts that have a longer term expiration date.

The contracts with a longer term expiration date will be priced higher than the short term expiration date, so you'll receive more than you have to spend. This results in a credit spread being created.

To highlight exactly how this spread can be applied we have provided a simple example below. To make things easy, we have used rounded prices rather than exact market data but the main principle is accurate. We have also ignored commission costs.

  • Company X stock is trading at $50, and you are forecasting a significant price movement in the short term.
  • At the money puts with a close expiry date are trading at $2. You buy 1 contract (containing 100 of these options), spending $200.
  • At the money puts with a long term expiration date are trading at $4. You write 1 contract and receive $400.
  • You have created the short calendar put spread and received a net credit of $200.

How Profits Are Made

Calculating the potential profit here is difficult, because it's based on changes in the extrinsic value and the effects of time decay and volatility. This is largely what makes the short calendar put spread a complex strategy, and it's the main reason why we don’t recommend it for beginners.

The idea is that a significant movement in the price of the underlying security will result in the extrinsic value of the two sets of options (those bought and those written) ending up equal, or very close to equal. The initial net credit is received due to the higher extrinsic value of the options written at the outset. So if the extrinsic value ends up equal on both sets of options, then that credit will be your profit.

For example, if the price of the underlying security goes up dramatically, then both sets of options could end up so far out of the money that they both become worthless. You’ll lose the money invested in the ones you bought, but keep the money received from the ones you wrote.

On the other hand, if the price of the underlying security goes down dramatically, then the price of the options will be made up virtually entirely of the intrinsic value and the extrinsic value will have largely eroded. As both sets of options have the same strike, the intrinsic value will be the same. This should mean the prices of both sets of options should be fairly close and you can sell the ones you own and buy back the ones written and still make a profit.

There is, of course, still a risk associated with this spread. If the price of the underlying security doesn't move at all, or only very little, then the options bought will lose their extrinsic value faster than the ones written (the rate of time decay is higher as the expiration date approaches). This could result in the options bought expiring worthless while the options written retain significant extrinsic value, meaning you would have to buy them back and possibly make a loss overall.

It's absolutely vital that you do buy back the options written once the options bought have expired. If you don't, you will be left with a short put position which will expose you to potentially unlimited losses.

Short Diagonal Calendar Put Spread

The basic principle of the short diagonal calendar put spread is essentially the same. The difference is that you would buy puts that are out of the money. As these would be cheaper to buy, you would receive a higher net credit at the outset and therefore potentially make a higher profit. The downside is that if the underlying security drops in price, the price of the options written will always be higher than the price of the options bought and this means there is a higher risk of loss.


The fact that the short calendar put spread is designed to profit from the effects of time decay and volatility makes it very hard to calculate what the potential profits, or losses, may be when using this strategy. If you are comfortable and competent in using the Black Scholes options pricing model then this will make things easier, but precise and accurate predictions will still be difficult.

This is a notable disadvantage of this strategy, and it makes it not suitable for beginner traders. The big advantage though, is that the maximum potential losses are usually lower than the maximum possible gains. Commission charges are also relatively low, because there are only two transactions required.