Any Traders who trade Calendar Spreads Exclusively?

Discussion in 'Options' started by Sean McLaughlin, Nov 30, 2009.

  1. I'm in Chicago and wondering if anybody here or in cyberspace exclusively trades calendar spreads?

    If so, I'd love to get a thread running about the pitfalls to be careful to avoid in this strategy. As well as winning habits to get into in managing these positions.

    A little background of what I've been doing lately:

    I'm trading at-the-money long calendar spreads in SPY, QQQQ, IWM, and DIA.

    My gameplan is to target 10% gains (net after commissions) and exit trades if the market moves beyond expiration breakeven points of each individual trade. The philosophy being: making quick-hit, high probability profits as often as possible. Putting theta and percentages in my favor. Typically, each trade I'm in lasts about 10-18 days on average.

    Generally, I'm putting close to 100% of my available cash to work. I realize this exposes me to the theoretical possibility of losing my entire account. However, the market would have to have a >15% overnight swing for this to happen (typically). I think the odds are in my favor.

    Anybody else doing anything similar? I'd love your input.

  2. Thats what LTCM folks thought.
  3. KING...I'd love your suggestions of ways to mitigate this risk?

    deep out of money puts? if so, how much?

    Any help would be greatly appreciated.
  4. You should be more specific. I take your post to mean you are selling ATM near-term calls against a long position in longer-dated calls at the same strike?

    If that is the case and you are using 100% of your portfolio, it is simply a matter of time before you blow up. You are more protected buying the longest dated calls - perhaps leaps would offer the best protection. But still, if this market suffers another Lehman style downside shock, I'm not sure how a portfolio such as that could be repaired. You could end up eating a 70-80% loss with no remedy. If your long position is only a few months out, you could be completely wiped out.
  5. One way to mitigate risk that might appeal to you is to split your portfolio with 50% of your spreads and 50% with covered calls. In this way if we have a Lehman style shock and your covered calls are on well-chosen stocks, at least you may have a reasonable expectation that these stocks will eventually recover, preserving more than 50% of your capital. You could also sell OTM calls against them as they recover, potentially improving that a bit. Still, recovery could take some time and would not be guaranteed. And your prospective monthly returns could be lower given the return on CCs is likely less attractive. But you would expect to sacrifice something for more protection no? I would hope so.
  6. MTE


    When you say you've been doing this lately. What's the exact timeframe you have in mind?

    The reason I ask is that the markets have been very well behaved in the last month or so with respect to rangebound strategies, so my "concern" is that you think you have found the "edge", but as soon as the market starts to trend again you will get wiped out, and the fact that you are 100% invested only adds to that risk.
  7. :eek: I cannot believe it, you’re basically advising him to have naked short puts as way to mitigate risk from a downside shock ! :eek: :confused:
  8. spindr0


    Calendars have risk in both directions but since they don't close the markets on good news so they can melt up, the downside is your concern.

    Insurance costs money. Better coverage costs even more. The question is, how much do you need and are you willing to pay for it, cutting into your returns?

    You indicated that a 15% overnight swing might wipe you out. I would suggest that you evaluate the cost effectiveness of long puts 5, 10 and 15 % OTM (weigh their cost versus how much protectiion they afford you).

    If the market moves that much that fast (or even in a few weeks), IV is going to spike up and that will help your calendars significantly, widening your breakeven points quite a bit. A 50% spike in IV might even afford you the ability to tolerate a 10% move in either direction. And given where IV was a year ago, 50% isn't out of the realm of reason. So you might need a lot less protection than you'd think in order to withstand a 15% move.

    Long OTM puts will do it. If you could live with cheaper, less effective protection, OTM put calendars might be helpfu (5 pct? 10 pct? )

    The best thing to do would be to use a risk analyzer and model the various outcomes of the different types and levels of protection and see if anything appeals to you in terms of the trade off of risk and reward.
  9. spindr0


    That makes no sense at all. A covered call is equivalent to a naked put. Doing naked puts instead of calendars doesn't reduce risk. It increases it. If you wanna go all crazy on this, at least do naked calls :)
  10. MTE - I've been trading on this strategy for 3 months now. And I totally agree with you. While I've had great results so far, I worry that it might be because I've had a very acommodating market to operate in. I am certainly aware of this issue and haven't convinced myself that I've found the holy grail to trading immortality ;)

    spindr0 - I agree with you. It is my thinking that in the event of a HUGE overnight move to the downside, an IV spike will certainly help to minimize my loss. It isn't a cure-all, but will help. I think combining this with some far OTM puts might do the trick.

    Since my target is to achieve 10% returns monthly, I'm thinking I'd be willing to spend 1-2% of my equity on OTM puts (approx. 30 days to expiration) to provide for some safety in the event of another 9/11-type situation.

    Thank you guys so far for your help in this. Any more thoughts would be greatly appreciated.
    #10     Dec 1, 2009