$200 to $2million Calendar Spread Challenge

[Sean McLaughlin]

With only 9 days left until January expiration, I shifted my attention to Feb options.

Today, I put available cash into a $SPY Mar/Feb 114 Call spread @ 1.00 (total cost = $102.52 after commissions). This still leaves $56.56 remaining in free cash which isn't ideal, but we'll deal with it. I briefly considered entering a 45 cent calendar spread in QQQQ, but when your position has to earn 10% just to cover the vig, it seems hardly worth the risk. We'll just let the cash sit safely idle for now until the current Feb/Jan comes off in the next few days.

Current open positions:

$SPY Feb/Jan 113 call @ 1.57
$SPY Mar/Feb 114 call @ 1.00

 

[Standard Oil]

Quote from Sean McLaughlin:

my favorite trading book of all time which I've read over and over is "Reminiscences of a Stock Operator" and that I wholeheartedly recommend "Atlas Shrugged" as my favorite book of all-time.

ha !

I would agree with this 100%

 

[johnmarg]

Sean:

Could you explain your most recent trade on SPY? It says 114 Mar/Feb for $1.00.

I thought a calendar spread was selling near call and buying long term call? Could you let me know the exact prices and dates for the call you sold and bought. I dont see a Feb long call? I am somewhat of a newbie. THanks.

 

[Sean McLaughlin]

Quote from johnmarg:

Sean:

Could you explain your most recent trade on SPY? It says 114 Mar/Feb for $1.00.

I thought a calendar spread was selling near call and buying long term call? Could you let me know the exact prices and dates for the call you sold and bought. I dont see a Feb long call? I am somewhat of a newbie. THanks.

John -

The SPY Mar/Feb 114 Call spread was entered on Jan 6 @ 1.00. What this means is: I bought the Mar 114 call long and sold the Feb 114 call short for a net debit of 1.00 (plus commissions). This was entered as one trade (I didn't enter each leg separately).

At the time I entered this trade, SPY (the underlying) was trading pretty close to 114.00. When I enter these calendar spreads, I choose the strike that is closest to the current market price in order to be as close to delta neutral as possible.

Does this answer your question?

 

[johnmarg]

Thanks for the explanation. What had me confused was the placement of the month of March before February in your post. I am used to seeing it reversed with the near expiration month posted first. I got it now.

 

[Sean McLaughlin]

Man, striving for 10% gains in calendar spreads really is tough around the holidays amid low activity and steadily dropping volatility. But, thankfully, exited our last January position today for our 10% profit target.

The SPY Feb/Jan 113 call spread we entered on 1/4 @ 1.57 was closed today at 1.78 for a $15.94 gain after commissions (or 10%).

Will take today's proceeds and put them back to work tomorrow in a Mar/Feb at-the-money calendar.

In the meantime, this is how the account stands:

Cash: $232.02
Open Position: $95.50
Total Value of Account: $327.52 (63.8% gain since inception on Sept. 24)

Will update with new trades tomorrow....

 

[sappjason]

Sean. I actually enjoy your experiment here. Pretty cool. How are you attempting to figure out market direction, which will ultimately be used in your decision to go long (calls) or short (puts)?

Also, do you enter your orders as spread orders or do you leg into positions? Lastly, how do you manage your exits (for losses)? Are you setting stops or just getting out the best way you can, when your -10% threshold has been hit?

 

[Sean McLaughlin]

Quote from sappjason:

Sean. I actually enjoy your experiment here. Pretty cool. How are you attempting to figure out market direction, which will ultimately be used in your decision to go long (calls) or short (puts)?

Also, do you enter your orders as spread orders or do you leg into positions? Lastly, how do you manage your exits (for losses)? Are you setting stops or just getting out the best way you can, when your -10% threshold has been hit?

Glad you find this interesting.

1) The whole point (for me) of using calendar spreads is that I cannot predict which direction the market will be going. I proved to myself a long time ago that I have no clue. A coin-flipper would do better than me. The best indicator of where the market will be tomorrow - is where it is today. And as such, I put on at-the-money calendar spreads that profit as long as the market stays +/- a few percentage points from where it is RIGHT NOW.

2) I'm typically leaning more towards calls because they tend to have the most open interest. Though theoretically, an ATM call calendar spread will have the same risk profile as an ATM put calendar spread.

3) I enter positions as a spread order. I do not leg in. I've tried. It doesn't seem worth the effort to me.

4) For losses, I don't set stops - too tricky on options. Basically, each afternoon, I look at each open position to see where the underlying is trading in relation to the expiration breakeven points. If the underlying is trading beyond either my upside or downside breakeven point - I will exit the position. In my experience, when this happens, I average about a 10% loss (sometimes more, sometimes less). Side note: I trade calendar spreads similarly in another account not related to this challenge - and this has been the tendency. As far as losses go, my biggest risk is a huge overnight move (think 9/11) that results in the markets trading FAR beyond my breakeven points without giving me an opportunity to exit. This would result in large losses, however, the huge spike in volatility would limit the damage to some extent.

Hope this adds some clarity for you...

 

[sappjason]

Quote from Sean McLaughlin:

Glad you find this interesting.
4) For losses, I don't set stops - too tricky on options. Basically, each afternoon, I look at each open position to see where the underlying is trading in relation to the expiration breakeven points. If the underlying is trading beyond either my upside or downside breakeven point - I will exit the position. In my experience, when this happens, I average about a 10% loss (sometimes more, sometimes less). Side note: I trade calendar spreads similarly in another account not related to this challenge - and this has been the tendency. As far as losses go, my biggest risk is a huge overnight move (think 9/11) that results in the markets trading FAR beyond my breakeven points without giving me an opportunity to exit. This would result in large losses, however, the huge spike in volatility would limit the damage to some extent.

Hope this adds some clarity for you...

Do you find yourself being religious about your exits for losses? In other words, once you see that you are beyond your underlying break-even by 10%, do you ALWAYS exit?

 

[Sean McLaughlin]

Quote from sappjason:

Do you find yourself being religious about your exits for losses? In other words, once you see that you are beyond your underlying break-even by 10%, do you ALWAYS exit?

I have been so far (crossing my fingers).

A little clarification: I'm not trying to limit my losses to 10%, nor do I use 10% as the trigger to exit. The only trigger I use is: whether or not the underlying is beyond my expiration breakevens. Because, at this point, I am no longer earning theta in the position (being paid to wait) - so there's no point. It just so happens that when I exit my positions at these points - my losses have tended to cluster around 10%, which is a number I'm comfortable with.