Any Traders who trade Calendar Spreads Exclusively?

[Sell 'em]

Quote from spindr0:

That makes no sense at all. A covered call is equivalent to a naked put. Doing naked puts instead of calendars doesn't reduce risk. It increases it. If you wanna go all crazy on this, at least do naked calls

I posted that with the assumption that the CC stocks would be bought unlevered. That is how I buy stocks and how I think about them, probably should have said so in my statement.

If he uses 50% of his portfolio to buy (without leverage) well chosen stocks, he has eliminated the risk of a 100% loss for at least half of his portfolio. That is a form of risk mitigation. Whether it is the best is simply a matter of opinion. I threw it out there because a CC strategy would likely click for someone in thrall of bull calendar spreads, in my view.

And I have a problem with the other suggestions that have been offered. This guy already has a needlessly complex strategy to capture gains in what he expects is a flat-to-rising market, yet everyone wants to tie him in knots to make it even more complicated. Buy some puts? Jesus f*cking christ. There are much simpler ways to make money in such a market. What the hell with three legs? The OP needs to shed his infatuation with a particular strategy and begin to think about the wisest avenue to capturing gains given his market expectations.

 

[Sean McLaughlin]

I should mention that I'm restricting my trading to index ETFs (SPY, IWM, QQQQ, DIA) at the moment.

This doesn't eliminate risk, but it dramatically reduces the risk of huge overnight gaps that are common in equities after earnings announcements, news, etc.

I'm also aware that I'm limiting myself by adhering to only ONE strategy. That's kind of the point. I'm out to discover if one can profitably operate on a strategy that he can get to know as best as possible. I'm putting all my eggs in one basket - and watching it like a hawk

 

[Sell 'em]

Quote from Sean McLaughlin:I'm putting all my eggs in one basket - and watching it like a hawk [/B]

When you've committed your entire portfolio to a long option position and the market turns against you, watching doesn't help.

 

[MTE]

Quote from Sell 'em:

I posted that with the assumption that the CC stocks would be bought unlevered. That is how I buy stocks and how I think about them, probably should have said so in my statement.

If he uses 50% of his portfolio to buy (without leverage) well chosen stocks, he has eliminated the risk of a 100% loss for at least half of his portfolio. That is a form of risk mitigation. Whether it is the best is simply a matter of opinion. I threw it out there because a CC strategy would likely click for someone in thrall of bull calendar spreads, in my view.

And I have a problem with the other suggestions that have been offered. This guy already has a needlessly complex strategy to capture gains in what he expects is a flat-to-rising market, yet everyone wants to tie him in knots to make it even more complicated. Buy some puts? Jesus f*cking christ. There are much simpler ways to make money in such a market. What the hell with three legs? The OP needs to shed his infatuation with a particular strategy and begin to think about the wisest avenue to capturing gains given his market expectations.

What's wrong with buying a put? Afterall, you have adivsed the person sells a put using 2 trades/legs instead of one.

 

[hidge]

ATM calendar spread is very sensitive to IV (on your case as a buyer you are long Vega).

You should be aware that the closer you are to expiration the more you exposed to changes in IV, specially if the underline is inside the sweet spot - which means not that far either way from your calender strike.

That known character of calendar spread should have you thinking about IV levels before pulling the trigger and buying the spread. If you'll think that IV levels are relatively high you might consider other strategy or a modification to your position that will protect you from an IV colapse.

For an example: look at April - July 2009. the SPX was in a range of 100 points in those 4 months (sounds a lot today but it was very calm relatively to the months before)

Sounds like a calendar spreader heaven?

IV levels colapsed that time from above 40 to near 25

I believe that trading long Vega strategies at that time was very challenging

Hope I helped

Oded

 

[spindr0]

Quote from Sean McLaughlin:

Since my target is to achieve 10% returns monthly, I'm thinking I'd be willing to spend 1-2% of my equity on OTM puts (approx. 30 days to expiration) to provide for some safety in the event of another 9/11-type situation.

While I doubt that you'll be able to sustain it, if you are achieving 10% returns monthly, you should not think twice about spending 1-2% on OTM puts to protect your cities.

 

[MTE]

Quote from hidge:

ATM calendar spread is very sensitive to IV (on your case as a buyer you are long Vega).

You should be aware that the closer you are to expiration the more you exposed to changes in IV, specially if the underline is inside the sweet spot - which means not that far either way from your calender strike.

That known character of calendar spread should have you thinking about IV levels before pulling the trigger and buying the spread. If you'll think that IV levels are relatively high you might consider other strategy or a modification to your position that will protect you from an IV colapse.

For an example: look at April - July 2009. the SPX was in a range of 100 points in those 4 months (sounds a lot today but it was very calm relatively to the months before)

Sounds like a calendar spreader heaven?

IV levels colapsed that time from above 40 to near 25

I believe that trading long Vega strategies at that time was very challenging

Hope I helped

Oded

As you get closer to expiration and your calendar is in the sweet spot your main risk comes from gamma and not from vega/volatility.

 

[spindr0]

Quote from Sell 'em:

If he uses 50% of his portfolio to buy (without leverage) well chosen stocks, he has eliminated the risk of a 100% loss for at least half of his portfolio. That is a form of risk mitigation. Whether it is the best is simply a matter of opinion. I threw it out there because a CC strategy would likely click for someone in thrall of bull calendar spreads, in my view.

[And I have a problem with the other suggestions that have been offered. This guy already has a needlessly complex strategy to capture gains in what he expects is a flat-to-rising market, yet everyone wants to tie him in knots to make it even more complicated. Buy some puts? Jesus f*cking christ. There are much simpler ways to make money in such a market. What the hell with three legs? The OP needs to shed his infatuation with a particular strategy and begin to think about the wisest avenue to capturing gains given his market expectations.

The best way to avoid loss from a serious down turn is to get out of the way. In the OP's case, he's talking about overnight crash so protection must be in place beforehand. While a CC/NP diminishes the risk of leverage, IMO, a smaller "beating" isn't a good answer for avoiding a beating.

As for his infatuation with a particular strategy and thinking about the wisest avenue to capturing gains given this market, that's good advice. But that doesn't mean he has any clue as to what it is. A better contribution would be to state what it is rather than aver what it isn't.

If calendar spreading is working for him and it's what he grasps, a 3rd leg isn't a bad thing. More complexity isn't a problem. The bottom line is the bottom line, eg., what he keeps after all is said and done. You and I will just have to agree to disagree on what we think appropriate hedging is.

 

[hidge]

Quote from MTE:

As you get closer to expiration and your calendar is in the sweet spot your main risk comes from gamma and not from vega/volatility.

Hi MTE

While this is always right with long Theta positions (the fact that Gamma explodes near expiration)

IV is also growing as your short option (which is your short Vega component) lose value and you long option is losing its value less fast - so it increase your overall position Vega.

Just to compare - an IRON CONDOR position which is short Vega by its nature- is less sensative to IV changes near expiration.

My comments was about paying attention for Vega risk in calendar spread and I agree that Gamma is the main risk near expiration

Oded

 

[Sell 'em]

Quote from spindr0:
If calendar spreading is working for him and it's what he grasps, a 3rd leg isn't a bad thing. More complexity isn't a problem. The bottom line is the bottom line, eg., what he keeps after all is said and done. You and I will just have to agree to disagree on what we think appropriate hedging is.

Happy to agree to disagree. Putting on a leg of puts sounds neat and tidy, but his portfolio will be a mess when it hits the fan. When Latvia and Hungary default, sending the S&P down 15% overnight, the risk involved during his exit is tremendous as he will be tempted to trade out of the multiple legs. When does he sell his puts? Does he hope for a bounce before selling the calls? Or does he just exit everything all at once? With spreads and commissions, how ridiculous is that transaction cost?

In the market environment he expects, I would assert his best approach is to simply trade futures - buying pullbacks and selling advances, over and over and over. Better yet, he could trade ITM index puts in a similar manner. Greater profit potential. Lower transaction costs. A better night's sleep.