$200 to $2million Calendar Spread Challenge

S

Sean McLaughlin

I've rediscovered the Elite Trader website and I've spent the day reading hundreds of great and informative posts.

In doing so, I noticed many people have created journals to track their progress in achieving goals. Some attainable, some simply outlandish.

Posting trades after-the-fact is disengenious at best. Moving forward -each trade will be updated here in real-time for followers to ride along and add their two cents.

Be gentle ;)

-Sean McLaughlin
Chicago, IL
 
wednesday, september 23, 2009

*Can I turn $200 into $2 million just trading Calendar Spreads?*

This is the question I posed myself. And I answered: "Theoretically, yes". However, theoreticals don't put money in my pocket, and the only way to prove something is to do it.

So, I opened a Roth IRA account with my trusty trading firm thinkorswim, and will deposit $200 into it.

If I'm right? Great! I'll have earned $2 million in pre-tax trading profits (which grew tax-free, thanks to the Roth IRA), international fame, a worry-free retirement, and a happy wife. (ok, maybe just *some* of that)

If I'm wrong? Well, I'm out $200. But again, here I'm a winner. Anyone who's traded for longer than a Jim Cramer temper-tantrum knows that losses are your best teachers. Winning doesn't teach you anything.

My method will be something like this:

I will trade at-the-money calendar spreads in highly liquid issues, typically ETFs such as SPY, QQQQ, DIA and such. Perhaps occasionally a high-volume stock if I'm feeling a little salty.

This will be a HIGHLY AGGRESSIVE portfolio. This means, my goal will be to keep all available cash working in a position. Whenever a position is exited and new cash is freed up, it will be put back to work ASAP in a new at-the-money calendar spread.

In each position, I will target approximately 10% gains, and I will attempt to exit losing positions when they are down 10%. This should give me a much better than 50% shot on each unique trade to make money. Thus, the expected value of this strategy should be positive. I am not a mathemetician, and therefore will not even attempt to calculate the odds of success and the actual expected value per trade. Call it a hunch ;)

If this works, how long will it take? I have no idea. I'd like to think I can accomplish this in less than 10 years. A quick excel spreadsheet depicting 10% average monthly gains says it would take me just over 8 years. So there we go...that's my target. 10% a month.

Do I think this will work? I have no idea...
 
Friday, september 25, 2009

*The Journey begins with just one step: The First Trade*

Today I entered into the first trade of our journey to turn $200 into $2 million.

I purchased one Dec/Oct $DIA 97 Call Calendar Spread @ 1.97.

Total Cost of Trade: $197 + $2.50 in commissions = $199.50.

As you can see, I've put all but 50 cents of my capital to work on this trade. I've entered a resting Good-till-cancel order to sell this spread @ 2.22 which would earn me $20 after commissions or approximately 10%.

The breakeven points currently are 93.94 on the downside and 100.04 on the upside. See the graph below.

If either breakeven point is violated before my profit target is hit - I will close this position and move on to the next.

And on we go!!!
 

Attachments

friday, october 9, 2009

*First Trade Closed*

A $2 Million journey begins with just one step.

This morning at the open, we closed out our first trade, and it was profitable - it hit our target.

We opened one $DIA Dec/Oct 97 Call Calendar @ 1.97 on September 25th. Today, we closed it at 2.23. For a gross profit of $26.00. After commissions and SEC Fees, the net profit is $20.96 which represents a 10.5% return on capital used in this trade. Total time in trade: 15 days.

Account Balance:
Cash: $220.96
 
friday, october 9, 2009

*New Trades*

After getting our first trade closed, I immediately began looking for new calendar spreads to enter to use as much of our available cash as possible.

With $DIA trading around 98.20, here is what I entered today:

One $DIA Jan/Nov 98 call calendar @ 1.37. Net cost after commissions: $139.52
One $DIA Dec/Nov 98 call calendar @ .76. Net cost after commissions: $78.52

This leaves a remaining cash balance of $2.92

The approximate breakeven points on the $DIA for this entire position is 94.25 and 101.68.

I've set GTC orders to exit the above positions at 1.56 and .89 respectively. In each, this target would represent a 10% NET gain per position.

Below is a graphical representation of my open position:
 

Attachments

wednesday, october 28, 2009

*The "Phantom Trade"*

I made two new "trades" along our journey today. Both trades entered into in the last post each exceeded their profit targets today, with the underlying ($DIA) trading at PRECISELY the short strike - $98.00.

This situation created a unique conundrum. I could have exited these two calendar spreads (Dec/Nov 98 Call, Jan/Nov 98 Call) at the intended targets (.89 and 1.56, respectively). However, what new trade(s) would I then move my capital into? Ironically, the answer is: These same two trades!

With 23 days till expiration of the short November options, and with the $DIA trading at $98.00... these two trades meet the parameters for new calendar spread entry. If the $DIA were trading at perhaps $99 or $100 when the profit targets where hit, then I would enter into new spreads at strikes of 99 or 100.

So, while the open positions have each reached their 10% profit targets, I have now increased the price target ANOTHER 10% higher to treat these as two new trades. In the meantime, I've avoided $10.08 in commission charges (which - by the way - would be a 4% hit to my current equity. Ouch!!).

Gotta love it when trades work out this way! Hope more of them work out like this.

Incidentally, these trades which were entered on 10/9 have achieved their 10% gains in 19 days.

Happy Trading!!

Below is the profit profile of these trades currently:
 

Attachments

monday, november 2, 2009

*Profit targets hit again.*

Wow...that was quick!

Since the "new trades" initiated this past Wednesday, the two open positions reached their next 10% profit targets again, in just 3 trading days. Nice!!

The Dec/Nov $DIA 98 call calendar spread (originally entered at .76) hit its second 10% net gain target at .98 today. And again, the $DIA was trading right around $98.00 (the short strike). So, we are just holding on to it and adjusting the profit target up another 10%...this time to 1.08 - instead of initiating new trades and incurring unnecessary commission expense.

Meanwhile, later in the morning, the Jan/Nov $DIA 98 call calendar spread hit its 2nd 10% net profit target of 1.72. At the time, the $DIA had sold off and had briefly broken below $97.00. So, we let our offer get hit. Total net gain on this position was $30.00 which represents a 21.5% gain on the original capital invested ($139.50, incl commissions). So that trade was completely exited and now I'm attempting to get into a new Jan/Nov $DIA call calender spread at the 97 strike at approximately 1.69.

Portfolio values as of these trades:
Open Positions: $101.00
Cash: $172.40
Total Value: $273.40 (a 36% gain since we started this challenge on September 24th. Nice.).

The Journey is off to a smashing start! :)
 
tuesday, november 3, 2009

*New Trade entered today*

We weren't able to get filled on the $DIA calendar spread that was mentioned in the last post. However, today we got filled on a $IWM Jan/Nov 56 Call spread @ 1.44 for a total cost of $146.52 after commissions. This leaves behind $25.88 in excess cash. Not ideal (remember the goal is to keep ALL cash in positions), but in light of the tremendous run we've had to start this challenge, not a big deal at all.

The price target of this IWM position is 1.64.

So, as of this writing, the portfolio stands as such:

Cash: $25.88
Open Positions Market Value: $246.00
Total Equity: $271.88 (36% gain since Sept 24).
 
wednesday, november 4, 2009

*Trade Updates for 11/4*

The $DIA Dec/Nov call calendar hit its 3rd 10% profit target today and was exited at the open at 1.08. It should be noted that it only took 2 days to hit this target since this trade hit its last target on Monday.

This trade was originally entered on October 9th at .76. This results in a $27 net gain after commissions, which translates to a 34% net gain in 26 days. Jackpot.

The beauty of this particular exit is that so far, it appears to perhaps have been the high of the day. The limit order got filled immediately at the open. Since then, the spread has been trading around 1.04. This is why you leave GTC orders in the market. Sometimes, you get a gift.

After this trade was exited, I immediately looked for another trade to put the cash back to work. The trade I entered is a $IWM Dec/Nov 57 put calendar @ 1.00. After commissions, the total cost of this trade is $102.52. The price target for this trade is 1.16. We are beginning to get close to November expiration. However, I decided that 16 days remaining seemed like a doable trade since the short option was still retaining around 90 cents of premium.

After these trades, the account looks like this:

Cash: $28.84
Open Positions: $246.00
Total Value of Portfolio: $274.86
 
monday, november 9, 2009

*Runaway Market requires an upside adjustment*

The market continues to run straight up, seemingly unstoppable. As such, we had to take off one of our open positions at a loss and re-enter a new position.

With $IWM trading over $59.00 this afternoon, we closed out the Jan/Nov 56 call calendar spread at $1.30 for a net credit after commissions of $127.48 which represents a nearly 13% loss on capital invested. We were in this trade for 6 days. We then took these proceeds, as well as a little of our leftover cash and entered into a Feb/Dec 59 Call Calendar Spread @ 1.29 for a total cost of $131.52 after commissions.

The remaining open position (Dec/Nov 57 put calendar spread) has 11 days till expiration of the short option. We are close to hitting the upside breakeven point on this position as well, so we might see this one exited fairly soon. Regardless, I don't predict market movements, so I'll just let the market tell me what to do.

After taking today's loss, the portfolio stands as follows:

Cash: $24.80
Open Position Value: $225.00
Total Value: $249.80 (24.9% gain since inception)

Despite the loss, the big picture still looks great and is far exceeding my expectations.
 
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