Adjusting A Put Calendar Spread When The Stock Rallies

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Put calendar: In tonight's video, we're going to be going over all the trades that we made for Wednesday, June 10th. In today's trading session, we only have one small closing order which we'll cover here at the end, and then one adjustment trade, actually, to our calendar. Our put calendar spread in IWM.

What we did here with IWM is we-we rolled up our short puts for June only. Now we have the June, July 118 put calendar, so we are hoping for, and expecting, a move lower in the market for this position of profit. Instead, the market's rallied up a little bit, which is okay. It's a small position. 

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What we want to do is roll up our short 118 puts from 118 to 123. What that's doing is closing out the 118 puts that were short because the market is rallying higher. Those short put options are now becoming worth less and less and less, and we're moving them to something closer that's got a little bit more premium so that if the market does continue to move higher, we just help reduce some of the risk on the trade moving forward.

That's the position that we did. We did it for a 30 cent credit. When you look at the chart here of IWM, you could see that we initially placed this trade about a month ago, anticipating that the market might make this kind of a move down to around 118.

Well, it's continued to move up just a little bit and so now, what were doing is we're taking this 118 put, which is down here naked, and we're rolling that up to the 123. We're getting a little bit closer to the market as the market rallies higher, and this gives us a little bit more credit to offset some of the risks.

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Now, this is what the resulting position looks like. But first I just want to pencil in here what the original iron, I'm sorry, the original calendar looked like. It was everything centered right over 118, Okay? You can see everything on this original calendar was centered right over 118, hoping that the market would move down.

Now that the market's moved up, what we've done is we've increased the credit that we received on this side of the trade, and so now this red solid line is our new profit and loss diagram. You can see we've increased that credit which has reduced our risk on the trade because we've increased this side, taking an additional 30 cent credit and we are taking just a little bit more risk on the back side of the trade.

You can see how this profit and loss diagram shifts and molds with the market. Now, in this case, we did this, and we're acceptable taking some more risks because at this point the stock has to move back down below 123 and 122 before it starts creating some loss. For us, that gives us an opportunity to take some money off the table at an even better return if the stock does come back down.

In our case with IWM we, I think, made the right adjustments. There's a very short adjustment to IWM, and especially since expiration is coming. The other trade we closed out today is our call calendar in GILD. We didn't adjust this one; we just decided to close it for a $30 loss. It was a small position. We were hoping that GILD would move a little bit higher.

It's moved a lot higher, so moved much further than we thought, outside of our call range. We were anticipating a move somewhere around 110. Then on the GILD chart, which should load up here in a second, you can see that the stock has made just a huge move, way past 110. Sat at 110 for a little bit for a couple of days but it's moved much, much further past that.

Implied volatility has continued to stay low. Which, doesn't help our calendar spread. Even though the stock's moved about $7, $8 beyond our expected target of 110, it didn't hurt us with this calendar because, it's a low cost, low probability trade. At the end of the day, we only took a $30 loss on that.

As always, I hope you guys enjoy these videos. If you have any questions or comments, please add them right below inside the membership area. Until next time, happy trading.

About The Author

Kirk Du Plessis

Kirk founded Option Alpha in early 2007 and currently serves as the Head Trader. In 2018, Option Alpha hit the Inc. 500 list at #215 as one of the fastest growing private companies in the US. Formerly an Investment Banker in the Mergers and Acquisitions Group for Deutsche Bank in New York and REIT Analyst for BB&T Capital Markets in Washington D.C., he's a Full-time Options Trader and Real Estate Investor. He's been interviewed on dozens of investing websites/podcasts and he's been seen in Barron’s Magazine, SmartMoney, and various other financial publications. Kirk currently lives in Pennsylvania (USA) with his beautiful wife and three children.