Hi all, Curious to how one trades calendar. I typically trade calendars/diagonals as a directional bet,and am often faced with the the fortunate dilemma of whether to take profit on all.some or none of the position.. As an example,I recently put on the Xom 5/25 - 6/1 82.5 call calendar for 4 cents.. Its now trading at .25 with the stock trading around 82. Obviously,in percentage terms the spread is a home run. My typical trading style is to liquidate a portion of the position to cover the initial debit and TRY to let the balance ride. Part of me feels that the only way to make real money is to let the short leg get assigned or expire worthless and then hope for a large move in my direction.. My biggest issues are what to do when i have a profit...If The stock is at the short strike come expiration,the spread likely up close to 500%...Would most of you take it off,or keep the position post expiration and hope for a large move? As a go to move,I typically take off half.. Any thoughts?
I trade them a lot. You really have to try hard to find a calendar that doesn't show a profit at some point....but as you say, the key is knowing when to take that. As far as closing the position, it really depends on liquidity and delta (legging out of ITM calendars is much more risky than legging out of OTM). I pretty much figure out what the fill price is I'll accept and rest the order--but you usually have to pay to close these close to expiry. If I can't get out at a reasonable price, I'm happy to roll the dice and take assignment / expiry and hold the resulting position. There's really a lot of moving parts to getting out of a calendar...
Your post says you are often faced with the dilemma of buying something at .04 expanding to 25 cents. Your approach is nice which is to take the risk out of it and ride the rest of the position. This means you have some ability to turn a way otm call calendar or put calendar (for that matter) into closer to ATM which quintuples the price. That is a skill most peeps would love to have. congrats ! Of course you could get fancy (although frankly I dont know why), you could "stabilize" the position if XYZ i sitting at the calendar strike with 1 day to go by replacing the front short month with a back month short to minimize short gamma risk. So if XYZ shoots up /down hard next day, your profits won't evaporate as quickly since your short strike has longer duration. personally, i'd take the 4 bagger and close all.