Tech stocks are en fuego, and gravity is officially dead. So says the Nasdaq’s wicked run to record highs. But, hey, with earnings season around the corner and market darlings like AAPL in the friggin’ stratosphere, you’ll be forgiven for wondering if you should ease off the gas a bit here.

If you’re looking for ideas to lighten up your long deltas, then today’s article will help. I’m going to share my favorite cash flow trade for when the market is overbought and implied volatility is in the tank – the put calendar. Rather than throwing a single calendar on and hoping we nailed the top of the swing, I’ll show you how to scale-in to increase your odds of success.

In case you need a primer on the horizontal put calendar spread, head over to the Theta section of the Tackle Trading Playbook and watch the intro video.

The Setup

Put calendars add negative delta to your portfolio while boosting your positive theta. That’s why I like them when the market is overbought. They cut down on my existing portfolio exposure (i.e., make it less bullish), thus reducing my risk in case the market finally drops.

At the same time, it’s a cash flow trade so it adds theta to the account. Together, these dynamics make adding put calendars in this environment favorable to various alternatives. Bear calls have crappy risk-rewards right now due to the uber low implied vol. Long puts are too aggressive and cut down on my theta. Bear puts are less bad but don’t provide positive theta. I could just close existing bullish positions as a way of reducing exposure, but that would also lower potentially lower my portfolio theta.

Hence, the put calendar is my preferred alternative.

Check out the chart of QQQ:

Suppose we bought the March $215 put while selling the Feb $215 put for a net debit of $1.50. This is a slightly OTM put calendar, which is why it starts off delta negative. The ideal scenario would be to see a pullback toward $215, accompanied by a bump in IV.

Here’s the initial risk graph:

Trade Management

My typical return target on this type of trade is 15% to 20%. Since we’re buying for $1.50, I would consider exiting at a profit of 20 to 30 cents. It may not sound like much dollar-wise, but remember you can use more contracts if appropriate for your account size.

I usually plan on risking no more than 50% of the initial trade cost, which is $75 per spread in this case. Thus, I would enter one contract per $75 I’m willing to lose.

If the stock pauses or pulls back and I can sell the spread around $1.70 to $1.80, then I’m out!

Scaling

If QQQ keeps rising from here and pushes outside the top of my profit range, then I’d look to add a 2nd put calendar centered at a higher price, such as $120. I’d probably do this when/if QQQ rallied to $226.

Here’s what it looks like when I have the 2nd put calendar on.

With QQQ now even more overbought, we’re hoping it finally pauses or pulls back. Now that we have two calendars on we’re in a prime position to hit our target even quicker.

If the stock pushes too far outside the profit range, I could deploy a third put calendar (probably at 225) to further expand the risk graph. Now I have a triple calendar – one at 215, 220, and now 225. This is the final adjustment and usually requires the stock to pullback pronto or else I get stopped out.

And, well, that’s all folks!

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