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A Put Calendar Spread Strategy - Option Trade on IWM with 23% ROI

Updated: Mar 16

If you have been looking at options trading for a while, you may have heard of an extremely advanced and flexible option strategy called Calendar Spread.

On Monday the 27th of March 2023, I traded this strategy on the ticker IWM. This is the ETF of the Russell 2000 Index which measures 2000 small-cap US stocks. In just 16 days, this trade brought in a profit of $726, that’s over 23% return on the money invested. You can have a visual sneak peek of the trade in the video at the bottom of this post.

Overtime ETFs tracking indexes like IWM have the ability to trade in a range and be more stable than individual stocks. For this reason, often these underlying securities are good candidates for strategies like Calendar Spreads and Iron Condors where you can make a profit for the simple passage of time with the stock going nowhere.

Underlying Trading in a Range and Volatility Skew

On the specific example of this trade, I believed that trading a horizontal strategy such as a Put Calendar Spread could be great not just because of the underlying trading in a range, but also because I could spot a volatility skew on these options. In fact, the options sold on this trade had relatively higher implied volatility than the options purchased, increasing the chances of success. Furthermore, I was also expecting a possible increase in volatility which could impact favourably on the premium of the options purchased.

All considered, on Monday the 27th of March 2023 I went on to create a Put Calendar Spread on IWM. With the stock trading around $173.60, I purchased 6 contracts of the $174 put options expiring on the 18th of August 2023 - 144 days left before expiration - and sold 6 contracts of the $174 put options expiring on the 21st of April 2023 - 25 days left before expiration.

This created a beautiful Calendar Spread as displayed in the video here featured with a maximum profit potential of $2110 and an entry debit/max risk of $3102. The risk/reward ratio on this trade was 68% to be achieved in 25 days. All I wanted at this stage was for the underlying to keep trading in a range between the two breakeven points - downside BEP $167 and upside BEP $183 - and eventually experience a rise in implied volatility which could further enhance the profit potential.

Trading a Calendar Spread Option Strategy

Making a Profit with the Passage of Time

Once the trade was placed, in the following days I just had to monitor my options management software to make sure the price would fluctuate within the profit area. As planned the underlying kept trading in the desired range and I could make approximately $30 a day thanks to the passage of time. In fact, in a Calendar Spread the short-term options sold lose their time value at a faster pace than the long-term options purchased.

On Wednesday the 12th of April, when there were still 9 days left on the options sold, I decided to buy back these options and take $726 in profits. However, I still believed that IWM could be trading in a range and decided to roll the calendar spread over selling other options with a longer expiration date. This had the potential to create some extra profits for me. I am going to discuss this trade in another article.

I’ll see you on my next release of the Options Trading Diary.




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