The Put Calendar

I have been doing some review of my January trading today – and coupled with receiving several great questions this week regarding Put Calendars – I thought I would break down the one I did in $AMZN on Friday.

First, the basics (courtesy of OIC):

Put_CalNow on to my trade:

AMZN_tradeLet me break it down:

  • I am long the February 07 Weekly 360 Puts
  • I am short the February 14 Weekly 360 Puts
  • This was done for a $2.12 credit
  • This trade takes margin

Now let’s look at potential scenarios to see how it can play out:

1) The stock continues to drift down (even into a Gap Fill area) by Friday 7, 2014. I got the short-term weakness, now what?

One path is to exercise the Puts on Friday 7, 2014 (be short stock at $360) if you think that it continues further down into the following week.

Another choice is to Sell to Close the 07 Weekly Puts thus adding to the $2.12 cushion you have. You would choose this path if you believe the stock has truly bottomed since you would be short the $360 strike for the following week (14w). I take this route a lot but it does leave the margin on.

You could do the above but then adjust the 14 Weekly Puts down a strike (this would eat into the cushion some). I take this route a lot but it does leave the margin on.

2) Price is at $360 on Friday 7, 2014. You won’t get much value for the long Puts. If you believe the stock is going to hold at this level you could remain short the $360 Puts for the following week. If price does hold through that expiration, the gain would be the initial credit only.

3) Price rebounds to $375 on Friday 7, 2014. The long weekly Puts will go poof. You will still be short the $360 Puts for the following week. If these hold until expiration, the gain would be the initial credit only.

4) Price flushes to $320. Oh boy! If this occurred I would exercise the Feb 7 Weekly Puts and hold them to expiration for the following week. At that point you would have a choice to adjust the Feb 14 Weekly $360 Puts down some strikes if desired.

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