The problem with calendar spreads

One tip for executing double RC's if you go that route...

Set up combo orders as:

1) the two spreads, as well as
2) the two straddles (or strangles).

Sometimes you can get a better fill going in/out one way over the other. For EA's/news, because the pre news demand is generally more concentrated, IMHO, opening fills tend to be better than closing fills.

 

Scoobie,

You mentioned that you are a "beginner", but I think that you have a lot of promise. I think that you will do very well in the future (if you are not already doing well).

I read the part about 1,2 ratio using puts that did not work well for Feb and Mar. I thought whether one improve on it in the type of market you put it on.

Have you considered putting a cheap butterfly at higher strikes. If the market rallies (which it did) and with a reduction in vix, then the cheap butterflies should do well.

Would this have made any difference?

I may be wrong in what I wrote, but I thought to write it nonetheless rather than keep it in my mind. I never traded ratios. I go for low hanging fruits. I seek safe positive rate of returns first. Most of the time 50% invested in safe risk free positions, and exploit high yields afforded by options strategies for the remaining 50%.

Best regards to all. Very knowledgeable and experienced
people in here. I am glad to have joined.

Have a profitable week!

 

Thanks for the kind words but i think im still a newbie. Maybe after 5 years of consistent > than 30% profits then i may consider otherwise

I like flies but just don't like paying the initial debit which is why i go for the ratio spreads. Im confident at worst i can at least make back the initial premium paid.

Can you pls elaborate on the above quote. No disrespect meant, but i don't think risk free positions exist. What strategies are you referring to by low hanging fruits?

 

Scoobie,

I take no offense at all when someone has a different opinion, particularly when someone is polite like yourself. But I can assure you that risk free trading exist. May be the definiton has different meanings to you and I, but it is likely that you just do not know about this yet. How do I know? Because I make money with them, but unfortunately I cannot reveal them here as I think they have value beyond what I can share in a public forum.

There are things that are below the surface in the trading world. Since I found such trading methods, I became convinced that there are traders out there that know many secrets that they may never reveal. It is unbelievable, but I will not blame you if you do not believe it. I had the same opinion as you do, until I have seen the light with my own mind...

I also noticed many very smart people in this forum. I do not trade their methods, but I try to reverse engineer what they may have in their heads when they write their comments. I will not trade their methods (as they have to be compatible with my personality), but I find it a pleasure to maybe see what they see.

These people have not just one edge. They have multiple swords, each with at least one sharp edge, and when they use them I am sure may heads roll in front of them...

Be careful out there. And BTW, the idea of fly I suggested was not meant to replace your ratio spread, but to hedge that position. You would have had a good proft with it with the ratio spread you had on.

I suggest that you continue understanding in more depth the utility of spreads. The more you appreciate spreading, the more I think you will also think in terms of strategy spreads. Among many things, spreads increase percentage return probability of success, and reduce the volalitility of your porfolio.

Cheers

 

Well this post got a long way from my initial comment that it was the last time I casually short some near to expiration options with little premium against my longs just to reduce my cost basis. Must admit, it led to some of the more intelligent comments and advise I've seem posted on ET.

 

Ha ha..i think you're gonna get a lot of pm's now. Maybe i'll have to send you one myself.

Cheers and good trading to you.

 

Riskfreetrading,

I like your "the cut of your jib." I agree with you entirely. How long have you been trading? Do you trade just options spreads?

And, what is your trading method? No, I don't mean for you to give away your secret indicators/code, but certainly in the spirit of this forum you can be a little specific and tell us what style of trading you tend to use-- in no particular order, price action, volatility, geometry/gann/Eliott Waves, trend/momentum following?

Thanks in advance.
Swingman

 

swingman,

I allocate only 10% of my portfolio in speculative trades (specs). I play specs with verticals, and keep rolling them. I use volume, macd, bollinger bands, and SMAs. As you may have imagined, there are other skills of the trade.

 

Hi all,

Reading this thread I notice that most of you (only) use calendar spreads as a strategy.
Why not include a position in the underlying to the strategy.
This (as you might know) increases the efficiency in hedging your delta’s in most strategies, simply because the bid/ask spread of the underlying is smaller.

Example:
When you think the implied volatility of an expiration is low with regard to the volatility of the underlying.
What you could set up as a strategy is: buy cheapest (measured in vola %) puts (of that expiration ) and buy the underlying in that amount that your position is delta flat. (your position is gamma long). Now you can simply buy /sell only the underlying stock position with an underlying price movement to re-hedge your delta’s.
This off course is only profitable when the movement of the underlying is larger than the loss in theta.

Tricky part with this kind of trading is that you must have a good risk management tool.
And probably more important, you need to be consequent in/ with your delta hedging. This means setting up a predetermined hedge scenario and stick to that.

With regard to the risk management tool I would like to make you aware of my risk management site “straddleplanner. com” . this site is perfect for analysing option strategies combined with underlying positions.

The site is still in beta so please let me know what you think of it and what can be done to improve it.

Regards,

AJJ

 

Hi,

After receiving some questions with regard to my previous posting, I think it is best to explain what I mean by working out an example.
To better understand my explanation, you can set up, manage and work out the example yourself at straddleplanner. com. (my site).

Gamma trading example:
Position to set up:
-Trading date: 14-Jun-08
-By 1000 stock XYZ @ USD 8.58
-By 25 puts “strike 8.50 exp:19-Dec-08 trading at Impl.vol of 41%.
-Interest rate 5%

How to enter straddleplannerdotcom:
1. open straddleplanner .com (unfortunately it is not yet “googleable”, thus type in the url)
2. Chose fundname: “XYZ” (click on NEW… and enter XYZ)
3. By 1000 stock XYZ @ USD 8.58 ( click field below XYZ and enter 1000)
4. Set portfolio date to 14 JUN 08 (Click on agenda icon. Portfolio date is the date on which you want to analyse your position. You can change this date the measure the time decay on your portfolio)
5. Enter interest rate 5% (click in box marked interest on add. Click on the date and change it to 19-Dec-08, click on 0.00 and enter 5).
6. Enter strike (click in box marked STRIKES on add. Click on the date and change it to 19-Dec-08, click on the 0.00 under Volatility to enter 41 and click on the 0.00 under Strike to enter 8.50)
7. Enter number of puts (click in column marked long next to 8.50 and enter 25)

You have now entered the entire strategy and can start analysing:

Press on calculate and all values are shown on screen.
-On the left of volatility you will see the call values (Price: 1.14, Delta: 60.54, Gamma: 15.21, Theta:0.31, Rho: 2.09, Vega: 2.37)
-On the right of Strike you will see the put values (Long: 25, Price: 0.86, Delta: -40.72, Gamma: 16.04, Theta: 0.21, Rho:-1.70, Vega: 2.37)
-On the bottom you will see the totals of the position: (Delta: 18, Gamma: 401, Theta: 5, Rho: -42, Vega: 59.)
-Premium: 2161 (Option price*contract size* number of option)
-Value: 10741 (Stock * stock price + Premium) (this number is the amount of USD or GBP or EU you need to invest to set up this particular position.

If you have the same values on your screen than “Congratulations” .

(you might want to save your position now. )

Now what can we do with this?
As you can see, the delta (18 long) of your portfolio is almost completely hedged.
But what will happen when the stock moves down from 8.58 to 8.02?
(click on 8.58 and enter 8.02 and press calculate)
Now you will see that all values will have changed.

I will not mention all values again, but just concern you with the important ones (for this strategy).
First the delta of the position (total delta) is now short 257 and the position value has increased to 10818. You can now re-hedge your postion again by buying 257 stock XYZ @ 8.02. (click on 1000 and enter 1257 and press calculate) You will see that the the total delta is now 0 and your portfolio value is now 12879.
This process now continues as long as the stock price keeps on changing.
If the stock XYZ for example decreases further to 7.60 you can buy an other 196 stock to re-hedge your position and thereby locking in profits.

Important note; in this example I have let the stock price decrease, but the same will happen when the stock price will increase. (in that case you can sell stock to re-hedge).
Also important is to decide upfront when to re-hedge your position. For example whenever your total delta position is long/short 250, 500….

Hope this helps you in getting a better understanding of what gamma trading is about and how a tool like straddleplannerdotcom can help you to manage positions.

Thanks.

If you have any other strategies, you want to analyse or discuss then please let me know.

AJJ