Credit for today’s post goes to Paul Seward, whom I shall affectionately refer to as “Big P” from here on out. In response to last Wednesday’s post on calendars Big P dropped an enlightening question on the masses.

“If I do a call calendar I get essentially the same risk graph as a put calendar for the same strikes and months. What’s the difference?”

What a lovely question Big P. You shall be rewarded with a chest full of edification.

The heart of your question refers to the magical principle of equivalent positions, synthetics as the cool kids say. Let’s begin with the premise of the question – that call calendars and put calendars are essentially identical. And correct you are. That is, when you compare a call calendar versus a put calendar where both are using the same strike prices and same expirations they deliver the same profit or loss in every potential outcome.

The proof is best served up with a pair of risk graphs, overlaid for maximize illustration. The blue risk graph represents a May/Apr 203 call calendar while the orange graph represents a May/Apr 203 put calendar. Lest you’ve lost your magnifying glass the net debit of the call spread shown at the top left is $2.10 while the debit for the put spread is $2.08. Off by a few pennies due to varying bid/ask spreads but for all intents and purposes, identical.

In case you’re curious the risk graph was created using OptionsAnalytix.

Dig deep into option theory and eventually you’ll find the bedrock principles. One of which is the distinct relationship between stock, calls, and puts. That is, any two can be combined to create the third. Which allows for some interesting avenues for creative outlet. Want to get all fancy pants in structuring a long call trade? Buy stock and puts simultaneously. Want to create a long put position without buying puts (cause they looked at you funny and you ain’t touching them), short the stock and buy a call.

The longer you trade the more you’ll understand that puts are calls and calls are puts and puts and calls are stock. Say that ten times fast while dribbling a basketball with your left hand and spinning a pen in between the fingers of your right hand while jumping up and down, record it and send me a video. Laughing makes me trade better.

Anyways, this synthetic relationship spills into spread trades. Verticals, diagonals, and calendars can all be structured with puts or calls. Doesn’t matter. If they’re the same strike/month then they are equivalent position.

So what’s the difference? Well, it sure ain’t the potential profit or loss. That’s identical. Instead it’s the management, exercise/assignment implications, and perhaps liquidity. Let’s just focus on the calendars since that’s what prompted Big P’s query.

With SPY @ $203 suppose you’re considering buying the $198 calendar mentioned last week. Should you use puts or calls?

Answer: Puts.

Why? Cause I said so, son. But if that’s not good enough, how about this.

First, the puts are OTM so you won’t have to worry about any early assignment issues. With the 198 calls, it may be an issue.

Second, OTM options are more actively traded than ITM. So the 198 line of puts boasts greater open interest and tighter bid/ask spreads.

Honestly, those are probably the main two reasons that matter for calendars. Bottom line: If you’re structuring your calendar with strikes below the current stock price, use puts. If you’re using strikes above the current stock price, use calls.

Not get crackin’ on that video.

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