DIA 70 put calendar closed

Originally taken as the MAR/JUN 70 put calendar, I got one roll out of it before I decided to close the trade for a small profit.

The initial debit of the calendar spread was $1.99, and that represents the total risk of the trade. The first roll bought back the short MAR 70 put and concurrently sold the APR 70 put. Credit received was $1.33. At that point, the trade looked promising as 2/3 of the risk was taken off with two potential rolls left in the trade.

But then the market rally of the century took place and ran my short APR 70 put to a nickel, at which point I bought it. That short front-month put is a hedge against time decay for my back-month long 70 put. Once that hedge disappears, you’re left with a naked long put, in this case a 70 put in JUN. Long puts with no hedge are not long-term viable. Not only do you need a move in the direction of your put, but you need a big move. Working against you is time decay, which erodes the options value as days go by.

Once of calendar trade falls apart and you’re left with an orphan long option, you either close the trade or assume the time-decay risk of an OTM option. I closed the trade and sold the long option for $1.32. Adding up the credits, $2.65 received. Adding up the debits, $2.04 paid. The net was $0.59 credit on an investment of $1.99.

Even when calendars do not ‘work out,’ you still can get a 30% return on investment. And that’s not annualized. The trade’s duration was about 12 weeks.

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