Market volatility can scare many inexperienced investors out of the market. However, there are ways to protect your portfolio value. One of the common tools employed by experienced investors is options. One particular strategy for using options is called the put calendar spread. This strategy can help keep your portfolio neutral to the market volatility and, optionally, begin moving your portfolio in a new direction.
The put calendar strategy is generally used during bearish markets. However, it begins with a position of neutrality. The investor wants to maintain short-term neutrality in their portfolio. As part of that strategy, the investor puts money into short-term put options on critical stock. If the stock remains neutral in that time frame, they have the option of renewing their put options or of taking a chance on the long term direction of the stock.
Put calendar spreads are a great tool for the experienced investor. In order to make them work, however, the investor needs to determine the market sentiment. Is the market bearish, bullish, or neutral at this time? Will that continue for the coming months? What might change? This sentiment will help determine the proper strategy to use in protecting the portfolio. In most cases, if the market is bearish and appears to want to remain that way for the next few months, a put calendar spread is the way to go.
You can use the put calendar spread on stocks, ETFs, and indices. It is best to use it on financial instruments, which usually have a narrow gap between bid and ask price. If the stock appears to be having short term oversell problems, but long term profit potential, this strategy is even better for investors.
The philosophy is to buy or sell put options based on their expiry dates as well as the market position. For example, if you think the market will be very bearish in the next few weeks, you would buy short-term puts to cover the next month. In a month, you can consider adding additional short-term puts or choose to invest in puts that are three months out instead. This balance requires careful investing and analysis to work properly.
It is best to plan the entire strategy around managing risk. That means planning for the worst case scenario if the strategy is completely wrong. Minimizing the costs and potential losses will help keep the risk to a minimum.