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For a long time now, I've been trading calendar spreads using puts instead of calls. Calendar spreads are cheaper to construct with puts than calls, and return a better profit dollar-for-dollar. Yes, there are some risks with put calendar spreads that don't exist with call calendar spreads; but if you know how to respond to them, the risks can actually turn into an advantage.

Let's look at the makeup of a put calendar spread. It consists of the simultaneous purchase of a longer term put and sale of a shorter term put, both at the same strike price, at the specified price ("net debit") you are willing to pay.

About 2 months ago, I purchased the January 2003 120-dollar put and sold the January 2002 120-dollar put on a leading tech company. At the time, the stock was trading at 90 and, having sold the 120 puts, I took a moderately bullish stance with this calendar spread. It cost a net debit of 500 dollars per contract. If the stock finishes in January, 2002 at 120, each contract will be worth more than 3,500 dollars-a 600% profit. My breakeven point on the downside is 70 and my breakeven on the upside is about 200. Given this wide range of profitability, I felt very comfortable placing the trade.

Since that time, the stock has fallen and the 120 put was assigned to me, resulting in 100 shares placed in my account at a cost of 12,000 dollars. Terrible news, right? Well, not really. There are at least two ways to deal with the assignment of stock when you are short a put. The first is to exercise the long put. In this case, I could have exercised my January 2003 120 put and been out of the position. However, I'd have taken a total loss of the 500 dollars per contract that I spent on the position. The second choice is to re-establish the position as it was before assignment. This is accomplished by selling the stock that has been placed in the account, along with ("married to") the same put that was just assigned to you. In this case, I'd be selling 100 shares of stock and the January 2002 120-dollar put, getting the stock out of my account and once again shorting the January 2002 put. As long as I receive 12,000 dollars per contract for this combination sale, I'm not at a loss. Anything more than 12,000 can be looked at as either a short-term profit on the immediate account activity or a reduction in the cost basis of the trade.

What actually happened in this trade? I immediately placed an order to sell 100 shares of stock and the January 120-dollar put that had been assigned to me. The market for the trade when I placed it was at 121 (12,100) per contract. The trade went off without a hitch and the original spread position was re-established. In broad terms of what actually occurred, I reversed the assignment of the stock by selling it, and I re-established the short put by selling it as well.

Did I win or lose with this assignment? Actually, I won! I was assigned the contract of stock at 120 per share (12,000 total for 100 shares, since a contract represents 100 shares). Yet I turned around and sold the position for 121 per contract, a 1-dollar gain (100 per contract). To look at it another way, I reduced the cost basis of my now re-established January 2003 / January 2003 120-dollar strike put spread from the original net debit of 5 dollars per contract to 4-a 20 percent reduction in the cost!

At no time during this series of events was I, or my broker, at any financial risk, even though the amount of stock assigned to me was very large. The broker did call me, to which I politely and confidently pointed out that they are at no risk at all, since I'm fully hedged by my long 2003 put. Brokers seem to calm down when they hear the words, "you have no risk, since I am fully hedged in this position." I reminded them that I have 3 days to sell the stock before they can require me to cover it with cash (I was assigned much more stock than I had cash in my account). The absolute worst thing that can happen to me is that I simply assign the stock to someone else by exercising my long put. Of course, I could also completely exit the position by selling my long put and the stock, as well-a move which usually results in a loss of approximately one third of the original investment in the trade.

Will I get this stock assigned to me again? I have no idea. But if that happens, I won't look at it with dread. I'll look at it as an opportunity to make a few dollars by re-establishing the position. And remember, in the worst of all scenarios, I can just exercise my long put and shove the stock on to someone else. In that case, my loss would only be the net debit I paid for the trade. It just goes to show that knowing how to use options can be amazing way to reduce the stress normally associated with trading.

Happy Trading!

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