Calendar spreads using leaps?

Discussion in 'Options' started by wartrace, Nov 27, 2008.

  1. wartrace


    I just finished watching a seminar by Ross Jardine explaining how he writes calls against a long position in LEAPS. Anyone here use that strategy? It seems as if it would be a good way to generate steady income with little risk.
  2. When people push their favorite methods - and especially when they charge a fee to teach those methods - they neglect the 'whole truth.'

    Sure, this is a good method - but only when the markets are neutral to slightly bullish.

    If the market heads sharply lower, a boost in implied volatility may reduce your losses, but the LEAPS option will decline in price by a MUCH LARGER amount than the call you sold.

    If you are confidently bullish, you can use this method.

    But there is one other risk that I have never seen anyone who recommends this method mention: If the stock undergoes a substantial rally - far beyond the strike price, this method can lose money. Yes, lose. First, the near-term option you sell reaches a delta of 100 and picks up value faster than the LEAPS. that alone costs money. second, a severe collapse in implied volatility reduces the value of your LEAPS, causing you to lose again.

    This method is riskier than it appears. It is ueful in specific markets, but unless you are a good prognosticator, this is a strategy best avoided.

  3. wartrace


    I realize the market is too choppy to try this right now but if/when more stability returns I would like to try it. The good thing is I did not pay anything for this information. There is no "program" to purchase. I WAS thinking about buying his book for 22 bucks just to read more on it.

    I rented the seminar video from traders brain-
    "option strategies for consistent income".
  4. [Like all option strategies, this one works under certain circumstances and not under others. If IV increases, you make more (lose less) money. If IV decreases, you make less (lose more). If price moves away from the strike, you make less/lose more.

    The ATM calendar spread has a neutral bias. You can select ITM and OTM spreads if you are bullish or bearish - though I would use puts spreads if bearish.

    I think that it's a better idea to use medium term options instead of a LEAP for your long leg. In the unlikely event that a market could actually drop 50% in a year (g), this spread would lose less than the LEAP spread since its debit risk is smaller. Any decrease in IV would also be to your gain (less loss).

    Use this strategy because it will perform well with a stock that you believe will trade in a moderately narrow range until near term expiration, not because someone tells you what a great strategy it is.