Calendar Options - Use Puts or Calls?

by condoroptions.com

A funny thing about calendar spreads is that, because both legs are at the same strike, it doesn’t make much difference whether the spread is constructed with puts or calls (as long as both legs use the same one). In pretty much every way—profit/loss profile, greeks, adjustments—a calendar call spread and a calendar put spread are virtually identical. So how do we decide which one to use? Generally, it’s a matter of splitting hairs.

Sometimes we’ll pick one over the other because it’s out of the money and has zero risk of assignment, at least initially. But the trades we choose have almost no assignment risk anyway, because we avoid options that don’t have a lot of premium and stocks that have an ex-dividend date between the time we open the trade and the first expiration. And, we close the trade well before expiration.

Another factor—though it, too, is usually very minor—is volatility skew. When we open a calendar spread, we don’t want to buy significantly more volatility than we’re selling. For example, if the implied volatility of the June 100 call is 25% and the IV of the July 100 call is 30%, we wouldn’t take that trade. However, if the June 100 put for the same stock is trading at an IV of 26% and the July 100 put’s IV is 28%, we’d be able to open the equivalent position without taking on excessive risk.

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