  ###### The Calendar Put Spread (Including LEAPS) is a bearish strategy. This strategy is the reverse of the Calendar Call Spread. In this strategy an investor will buy (long) an in-the-money put that is typically 6 months to 2 years before expiration, and sell (short) a near term put at a lower strike price. Since the long term purchased put is in-the-money and has more time value this strategy is always a debit transaction. A profit will be realized if the underlying stock moves below the break even point. Some investors will trade same strike Calendar Put Spreads (horizontal) which is a less conservative strategy than diagonal spreads. Buy an ITM put a few months or a year out in time. Sell a near term put one or more strikes below #1 put. The net investment is the net debit (difference in premiums). The maximum risk is the net debit (difference in premiums). The maximum profit is realized if the stock is anywhere below the sold put strike (lower strike price) at expiration. The maximum profit is equal to the time value left in the bought option at the sold option expiration minus the net debit. The break even point is the the point at which the value of the bought put will equal the net debit. A profit is realize at any price below the breakeven point.
##### The return calculations for the Calendar Put Spread are:
 % Assnd = Max. Profit ÷ Net Debit % Assnd = (Long Put Time Value - Net Debit) ÷ Net Debit % Dnsd Prot = Premium Income ÷ Buy Price of Long Contracts % Dnsd Prot = Sold (short) Put Bid ÷ Bought (Long) Put Ask % Unch = [Long Put Value (at short-term exp. w/ current stock price) - Net Debit] ÷ Net Debit Example: Stock XYZ at \$32.90 per share. Buy the 09 JAN 40 Put for \$8.40 Write (Sell) the SEP 30 Put for \$0.80 % Assnd = (Long Put Time Value - Net Debit) ÷ Net Debit % Assnd = (10.30 - 7.60) ÷ (8.40 - 0.80) = 2.70 ÷ 7.60 = 35.5 % (Stock must be at \$30.00 to achieve this percentage) % Dnsd Prot = Sold (short) Put Bid ÷ Bought (Long) Put Ask % Dnsd Prot = 0.80 ÷ 8.40 = 9.5 % % Unch = [Long Put Value (if stock stays at \$32.90 at short term exp.) - Net Debit] ÷ Net Debit % Unch = [8.00 - 7.60] ÷ 7.60 = 0.40 ÷ 7.60 = 5.3 % Max. Risk = Net Debit = 8.40 - 0.80 = \$7.60 (if stock is above \$40 at JAN 2009 exp.) Max. Profit = Long Put Time Value - Net Debit = (10.30 - 7.60) = 2.70 (if stock is at \$30.00) Long Put Value = Black Scholes value of the long put when the stock price is at the lower strike. Break Even = Stock Price when long put value is equal to net debit = \$33.46 Write Cycles = Months to Exp. Of Bought Put / Months to Exp. of Sold Put Write Cycles = 6.63 (199 days) ÷ 1.5 (45 days) = 4.4 (or 4 write cycles) Determining the Long Option Value for % Return If Assigned and % If Unchanged: When the short-term option is near expiring in-the-money, it is usually more profitable to buy stock on the open market to cover the obligation rather than exercising the long-term option. This is because the long-term option will most likely have some time value left, as a result, it can be more profitable to sell the long-term option rather than exercise it. So, when PowerOptions shows the % Assnd. and % Unch. for these trades, we show the returns using the Black-Scholes value of the long option to approximate the price an investor could sell the option for. To verify the returns that appear on the SmartSearchXL or the OneStrike Tools for Calendar Spreads, simply click the More Info. (little blue button) on the far left of the corresponding row. Select "Calculators" from the More Information Menu and then select "Black-Scholes" for the "Buy Option". For the Long Put Value in the % Assnd calculation, enter the short option strike price value in the "Stock Price" box. Then click the "Use These Hypothetical Numbers" button to calculate the theoretical price of the long option. Scroll down to the date of the short term expiration (In our example, August 20th) to view the calculated value of the long option at short term expiration. To verify the % Unch. value, follow the same procedure but enter the current stock price into the "Stock Price" box on the Black-Scholes calculator tool. This will calculate the theoretical long option value at short-term expiration if the stock was unchanged. This is a BEARISH strategy, the profit can only be realized when the stock price is below the breakeven point. If the stock drops the gains are limited to the difference in the strikes minus the Net Debit. Losses are limited to the Net Debit (Net Investment). No stock is actually owned (uncovered position). If an investor purchases the Long Put several months out in time, near term Puts can be written several times before the Long Put expiration. Therefore, the cost of the Long Put can be greatly reduced with many writes. One of the principal advantages of this strategy is that one can write the near term call many times before the expiration of the LEAP. Therefore, the cost of the leap can be greatly reduce with the many writes. If the stock drops very quickly there is the possibility of actually losing money if the near term put is assigned. Therefore, it is important that the difference in strike prices must be larger than the cost of the bought (long) Put to assure a profit. It may be difficult to write a near term Put for every write cycle (depending on the underlying stock options series). In-the-Money Puts have a tendency to be assigned early. If the stock drops close to the sold (short) Put strike price, you may want to roll out the sold (short) Put if you wish to avoid early assignment. 