Long Put Calendar Spread

A Long Put Calendar Spread involves buying a long-term put option and selling a short-term put option at the same strike price. It profits from time decay and minimal price movement in the short term, while also providing a hedge in case of a market decline.

• Ideal for neutral to slightly bearish conditions, where the price is expected to remain stable in the short term before falling later.
• Buying the longer expiry ATM put ensures long-term protection, while selling the shorter expiry ATM put generates premium income.
• Profits from time decay of the short-term put option.
• Risk is limited to the net cost of the strategy.
• Maximum profit occurs if the price is near the strike price when the short-term option expires.

Example:

• NIFTY trading at 18,000.
• Buy 18,000 Put (next month expiry) at ₹300 and sell 18,000 Put (current month expiry) at ₹150 (lot size = 50).
• Outcome:
  1. If NIFTY stays near 18,000 at short-term expiry:
     • The short-term put expires worthless.
     • Net profit = ₹7,500 (premium collected).
  2. If NIFTY falls to 17,600 at short-term expiry:
     • Loss on the short-term put = ₹20,000.
     • Gain on the long-term put = ₹20,000.
     • Net profit = ₹0.
  3. If NIFTY rises significantly:
     • Both put options lose value, but the long-term put retains some time value.
     • Net loss = ₹7,500 (net premium paid).