by request, here's a calendar spread thread. The purpose of this thread is to learn, explore, share and trade and Calendar Spreads. I am not a broker. I am just - a guy. I'm not an expert and am not the best trader in the world. I do more diagonals than straight calendars. So save your flames and let's go. My current calendar is: DIA Dec 105P/Jan 104P for .20 debit.
For those that are interested RedOption has a relatively inexpensive advisory service with a good track record for calendars, diagonals, and similar strategies.
Gator, thanks for setting this up. I tried one calendar call back in April based on a service's recommendation. I had great fun with it, but didn't learn a thing about what I was really doing. I had no idea on when or how to get out as I kept it after the service recommended dumping it. In the end I just about broke even, but I had a few months where I brought in some great premium. So, I'll be asking a lot of basic questions, but am looking forward to supplementing my vertical credit spread strategy with calendar spreads.
Hi and thanks for setting this up I will mostly be following because I'm a little skiddish on calendars..
So, maybe I'll start with what I did back in April and we can analyze it. Started with the following initiated on 2/28/2005: Buy the September 2005 OSX 150 Call at $7.5 Sell the April 2005 OSX 150 Call for $1.70 OSX was at 141 when the trade was initiated. This seemed to me to be somewhat like selling calls on stock (except of course that an option has a time value premium). Can we look at what happens under various scenarios perhaps referenced to the April expiration.
One thing I've learned with the advisory services is not to count on them to get you out. They get you in, but you have to rely on common sense to get out. They play things to the end and count on rolling to get their credit. I don't like that. I've aimed on several spreads to leg in for credits, then buy back the short strikes for a nickel, when able. That leave a lottery ticket play, or wait for bounce back and sell a new short. It definitely requires some patience.
Well, maybe my question is too basic. What I was hoping we would do is just a quick primer on what happens to this position if held to April expiration with the SPX at 150, above 150 and below 150. Then maybe we could follow up with what adjustments could have been made to the position prior to April expiration based on an assumption that the SPX would stay above 150 or below 150 (I think adjusting before expiration with the assumption that the SPX finishes right dead on 150 is unrealistic and maybe it doesn't make any difference).
I am very much looking forward to this thread. I agree, it's easy to get in. Knowing when to get out, or adjust, is the hard part. Hope I can contribute. Thanks to all! Dan
I stole a comment by Michael from the OptionClub Yahoo Group. It's one approach to Calendars. :eek: --- In OptionClub@yahoogroups.com, Michael Catolico <mcatolico@m...> wrote: > > i look at calendars as a variation on a butterfly. they act much the > same as flies in that the goal is to have the underlying expire as close > to the short strike as possible. however they are more complex since by > trading a calendar you are trading volatility. > > an ATM calendar is what i consider a schizophrenic trade. because you > are short an ATM strike you want the underlying to basically do nothing > and sit still. but because you are long a back month strike you are long > vega. that means you want the stock to be volatile. if the stock dies > your short premium comes in but so does your long premium. if the stock > moves around, IV increases but the price movement can swing out of your > ATM price zone. so you can therefore lose in two conflicting ways. > > that's why i prefer calendars in two circumstances 1) making cheap > directional bets on near term events and 2) setting up a position into a > back month news event or earnings play. > > as a directional bet i look for situations where news is going to happen > in the front month. here usually there is a skew with front month IV > higher than back month IV. when the news comes out there will be certain > IV crush across the board but hopefully the price movement will more > than capture the vega loss. i analyze the play by assuming IV on the > whole position will drop to slightly below the long term IV average and > then look at my risk/ reward scenario. > > as an example look at CEPH which has earnings this week. the stock is > trading around $45. i might take a bet that earnings will disappoint and > try a NOV/DEC 40 calendar. because earnings are happening soon NOV IV > is skewed higher than DEC IV (49% vs. 40%). i can buy the calendar for > about $0.30. long term IV averages about 35%. if i look at what the > spread is worth if IV goes to say 30% i'd examine the value of the > spread. if the stock is unchanged and IV drops to 30%, the spread will > be worth about $0.20 by next week. if the stock drops to 40 the spread > will be worth about $0.60. and of course if i'm wrong on direction and > the stock gaps higher the trade is probably worthless. so given those > three scenarios it's not too bad of a trade, especially if there is any > reason to be especially bearish. > > for the second type of situation where i'll look at a calendar is when > news is expected after front month expiration. since earnings season is > basically winding down i don't have a good example for this. but suppose > a stock has earnings the week after NOV expiration. i might look to do > an ATM NOV/DEC calendar thinking that the stock might remain quiet > through expiration. but with earnings coming shortly after, there's a > good chance that the DEC IV will remain strong and perhaps increase. so > by doing the spread now i put myself in a decent position to own that > DEC option cheaply and then using that as an anchor leg for a spread > going into actual earnings. > > in general i always try to match the expirations as closely as possible > (e.g. i don't buy a LEAP and sell front month premium against it) since > the correlation in IV gets weaker the farther apart the expirations are. > and generally i like to get calendars where i think i can at least > double the value if held until the short expiration. > > michael