Each option strategy has it's own plusses and minuses. There is no panacea as they all will work from just buying a put or call to vertical rolls and back ratio's. Some things to think about. How is your strategy effected by volatility? When do I put on this strategy or how many days out? What is the implied volatility, what is the historic volatility? How much vega risk is there in the play? How do earnings of the equity effect my option play? How much delta risk do I want to be exposed too? Should I buy insurance to hedge immediately or is it something I can add later? Do I adjust early or later? What type of adjustments work best for the strategy I am doing? How liquid is the instrument I am playing? If the market moves against me how wide do the spreads get and how much loss in execution will there be? There are more I could add to this list but options take time to learn. I find some strategy's are easier to manage than others. Having said that each of us has our own strengths and weaknesses in doing option plays. Some may find a condor easy to adjust while others find butterflies easy to adjust. Never get hung up on one option play. You should have multiple strategies you use. For instance in a low vol environment with the vix low then calendars are a viable play. Why? because selling options you don't have the juice and I would rather buy the volatility. Personally I find calendars one of the most forgiving of the option plays. Yes you are at vega risk but if you don't have a wacko equity and doing it on something liquid and behaves you normally will be successful. Good Luck..
OK, so you didn't get hammered after being hammered. Got it. Sorta like voting against it after voting for it? There isn't a one size fits all cookie cutter answer for stop losses. As I said previously, getting hammered = a big loss. That should never happen unless there's a gap or a really fast market where you can't execute at a given price. The fine tuning is an individual thing.
Hmmm...really? This is a slightly bearish play. If the UL goes up, wouldn't you get hit by both delta and vega? I would prefer OTM call calendar, especially lately with markets trending higher. If UL dips, you have some protection with the increased volatility.
I have a few questions for anybody willing to answer: 1. what is the difference between a put and call calendar? 2. using a calendar, is there a way to more accurately define my break-even points or would I need to use a butterfly/condor for this? 3. how do most of you use calendars? It looks like a range play that can become somewhat directional but it seems extremely difficult to hit your strike of choice at expiration. 4. what delta/gamma exposure do you guys look for? all calendars are theta/vega positive but otm call/itm put calendars look to be delta pos/gamma varied. itm call/otm put calendars look to be delta neg/gamma varied. Ideally, when long, it seems obvious that I would want to be in as many positive greeks as possible.
I will attempt to answer your first two questions, not because I'm an expert, but because I am interested in the subject matter and want to learn. Maybe somebody else can answer the last two questions. (1) The difference between a put and call calendar is that one is composed of puts and the other of calls. I believe the call calendar is generally preferable in a rising market and the put calendar in a declining market. (2) You can accurately define your break even points with a calendar. Here is an example call calendar: Short call RIMM1118F57.5, expiry 18Jun2011 and long call RIMM1116G57.5 16Jun2011. I created the chart below using http://www.avasaram.com/ and found break even points at 52.03 and 64.13. The r/r is 3.46, but I doubt that will be achieved because it is unlikely that RIMM will be right at the peak of the chart at expiration. <img src="http://www.elitetrader.com/vb/attachment.php?s=&postid=3147468">
thanks for the reply. 1. I must ask, why? 2. say i think RIMM is staying between 55 & 65, is there a way to structure my calendar using those as break-even? how close would the underlying need to be to the strike chosen for you to take profit?
The back month of your calendar spread will be the most sensitive to volatility. The father out you go the more volatility you will be buying. Thats why they can be very profitable in a low volatility environment or approaching earnings. As time decay works on your short strike then it becomes even more volatile. Timing is everything in a calendar because you have to know what price to pay for the underlying for the spread. Take Rimm for example. Watch an at the money spread for a month three times a day and record the cost of the calendar spread. You will soon learn what a good price is. The other thing I normally do is always use the puts. Why? Because if the market has a huge down draft the volatility of the back month puts will expand faster than calls. You also will not be subject to dividend risk if you equity pays a dividend, its near expiration, and you have a deep in the money call calendar. Your short stock on your call calendar deep in the money and you likely will be exercised, not that its a big deal but it does cost for the assignment but moreover you have to pay the dividend to the person who called you out. I would urge you to get some graphing software too so you can model these option stradegies. As to profit I normally take 20-25% on my calendar option plays.