I want to start trading calendars but there are several issues that hold me back. I am sure there are people on this board that have plenty of experience with calendars and I would like to get their advice on the following:
1. UL selection - I don't want to use individual stocks because of too much gap risk. This limits me to ETFs or indexes. I am thinking of SPY, QQQ, and IWM for the beginning. But which one is more appropriate?
2. Timing - Calendars perform better when IV of the UL is low. This would be now since we have fairly low IV for all three ETFs above. However, there was a VIX spike in the last several days. Should I wait for a lower VIX to initiate a position?
3. Bias (bull or bear) - I am thinking of initiating a slightly bearish position (e.g. 139 put spread on SPY). Any reason to move my strike closer to the spot price?
4. Front/back month selection - Sep/Oct or Sep/Nov? The latter would give me an opportunity to sell an extra Oct option. Is it worth the hassle or is it better to close one position and open another one near Sep expiration?
5. Exit strategy - does it make sense to exit after 10-15% gain that may happen within a first week or two or hold till (almost) expiration?
6. Maximum reasonable risk - The absolute risk of the strategy is the total debit paid however I plan the exit the trade earlier if it does not work out. Where should I place my stop order? Is 20% of the spread value enough or should I use a wider stop?
7. If I want to scale in and out of the position (1/3rd at a time), should I use the same strike or different depending on the UL move?
I want to start trading calendars but there are several issues that hold me back. I am sure there are people on this board that have plenty of experience with calendars and I would like to get their advice on the following:
1. UL selection - I don't want to use individual stocks because of too much gap risk. This limits me to ETFs or indexes. I am thinking of SPY, QQQ, and IWM for the beginning. But which one is more appropriate?
2. Timing - Calendars perform better when IV of the UL is low. This would be now since we have fairly low IV for all three ETFs above. However, there was a VIX spike in the last several days. Should I wait for a lower VIX to initiate a position?
3. Bias (bull or bear) - I am thinking of initiating a slightly bearish position (e.g. 139 put spread on SPY). Any reason to move my strike closer to the spot price?
4. Front/back month selection - Sep/Oct or Sep/Nov? The latter would give me an opportunity to sell an extra Oct option. Is it worth the hassle or is it better to close one position and open another one near Sep expiration?
5. Exit strategy - does it make sense to exit after 10-15% gain that may happen within a first week or two or hold till (almost) expiration?
6. Maximum reasonable risk - The absolute risk of the strategy is the total debit paid however I plan the exit the trade earlier if it does not work out. Where should I place my stop order? Is 20% of the spread value enough or should I use a wider stop?
7. If I want to scale in and out of the position (1/3rd at a time), should I use the same strike or different depending on the UL move?
Thanks,
RR
Calendars are a difficult trade because of the two different months but this would be a good time to do so if you are expecting an increase in volatility.
I don't trade these, I will add, so I don't know if I could be much help for you but since nobody replied, I will say that you will have to think a little bit out of the box in the construction of this trade. In other words, customize the strikes and don't be trading the front month, go a little further out, say OCT/MAR. Use the puts only and maybe sell around the 10-20 delta.
You will have to continuously manage this trade, keeping an eye on skews especially. This is a difficult trade but can be really good balance to your portfolio. I would try these on paper and like I said, don't put any standard calendar on. Set one up where you have +vega, +theta, -delta and that might help you get started. Close this if/when you get the big pop.
I want to start trading calendars but there are several issues that hold me back. I am sure there are people on this board that have plenty of experience with calendars and I would like to get their advice on the following:
1. UL selection - I don't want to use individual stocks because of too much gap risk. This limits me to ETFs or indexes. I am thinking of SPY, QQQ, and IWM for the beginning. But which one is more appropriate?
2. Timing - Calendars perform better when IV of the UL is low. This would be now since we have fairly low IV for all three ETFs above. However, there was a VIX spike in the last several days. Should I wait for a lower VIX to initiate a position?
3. Bias (bull or bear) - I am thinking of initiating a slightly bearish position (e.g. 139 put spread on SPY). Any reason to move my strike closer to the spot price?
4. Front/back month selection - Sep/Oct or Sep/Nov? The latter would give me an opportunity to sell an extra Oct option. Is it worth the hassle or is it better to close one position and open another one near Sep expiration?
5. Exit strategy - does it make sense to exit after 10-15% gain that may happen within a first week or two or hold till (almost) expiration?
6. Maximum reasonable risk - The absolute risk of the strategy is the total debit paid however I plan the exit the trade earlier if it does not work out. Where should I place my stop order? Is 20% of the spread value enough or should I use a wider stop?
7. If I want to scale in and out of the position (1/3rd at a time), should I use the same strike or different depending on the UL move?
Thanks,
RR
Hi RR...have had some experience. Takes a lot of patience to manage and you have some well thought out points.
-The large index products are best..spy,spx, iwm, all good to go.
tough to get an edge in fill's.
-timing, vix isn't as low as it can go but is low enough. If your doing put calendars however and it (the vix) goes lower then it won't work as well. Obviously you want a slow moving UL.
-If you have a bearish bias then go a little otm...if your right you'll make money. If your neutral then closer is better.
-exit strats..well they take a great deal of patience and are best held to expiration(almost) unless your opinion changes and you decide to close them out. I wouldn't set a 20%...that can and does get hit so often you won't be able to turn much of a profit.
-risk is not necessarily just the debt...I've lost more than the initial debt when I mishandled the trade.
-definitely would NOT scale in or out. Each bet is pretty much stand alone defined risk trade. If you go out several months and roll into a different strike creating a diagonal then you raise the risk.
For me the downside to the calendar is the cost of comission due to all the rolling. Profits on calendars are very small and comish can eat up most of it. With the large index products you now have weeklies so you can roll every week. I haven't tried that but I do look at them occasionally just never seems to be a good trade.
GL
Oh and I definitely would NOT go out farther than 3 months..OCT/SEP or NOV/SEP...the world could come to an end after that. I have done 6 month calendars and those were the ones that crazy things happened and usually lost money.
In other words, customize the strikes and don't be trading the front month, go a little further out, say OCT/MAR. Use the puts only and maybe sell around the 10-20 delta.
Is this specifically to take advantage of the index skew? If you sell 10D-20D puts, what trade would you do on the back month? Do you hedge (how?) so you only bet on skew and IV?
Is this specifically to take advantage of the index skew? If you sell 10D-20D puts, what trade would you do on the back month? Do you hedge (how?) so you only bet on skew and IV?
If I was looking at an OCT/MAR calendar, I'd make it a ratio set up. Selling at around the 10+ delta and buying less of the long further away from the money for the back month. The bet is on an increase in vol, I'm looking at RUT but needs constant management. I have one I just set up but again, this is not what I trade, just thinking out loud and analyzing. Set up is -delta, +vega, +theta. This is not an easy trade but if we got a nice move in vol, this is a winner.
Thank you for your answers. I see two contradicting ideas for time frame selection: SEP/OCT and OCT/MAR. For me it looks like the first one is better because it has higher theta and higher vega for an equal position size.
As for exit strategies, I saved an order on IWM 79 Sep/Oct Put calendar yesterday when it was trading @0.99/1.01 per spread. Today the same spread could be sold for 1.13/1.15. It's at least 13% in one day.
If I opened this position yesterday, would it make sense to sell it today for 13% gain instead of waiting longer?
