Beginner Growing Account With Options Trades

[Roark]

Quote from juice831:

thanks for the reply.

1. I must ask, why?

2. say i think RIMM is staying between 55 & 65, is there a way to structure my calendar using those as break-even? how close would the underlying need to be to the strike chosen for you to take profit?

1. I believe the reason call calendars are preferred in a rising market is because you can set up the calendar by shorting a front month option and buying a later expiration call. Hopefully thereafter, the front month option will expire worthless leaving you long a call in a rising market so that your upside is now unlimited. Reverse that for puts.

2. You can play around with different strikes and expirations to try and get the break even points to encompass your desired range. For example, try a call calendar composed of short RIMM1116G57.5; expiration 16 Jul 2011 and long RIMM1117I57.5; expiration 17 Sep 2011. Break even is at 51.37 and 65.37. That gives you some more breathing room at the lower end of your desired range and is almost dead on at the upper end.

With respect to taking profits, I suppose if it was more than 50% of max profit I would consider cashing in. That would depend though on the spread between bid and ask. It could be an illiquid situation for which it is better to let it ride. My main concern wouldn't be what to do in the event of a profit, but what to do in the event of a loss. Profits tend to take care of themselves. It's the losses that bother me.

ps: pberndt seems to know more than me. You're probably better off taking his advice.

 

[vmora]

Quote from pberndt:

The back month of your calendar spread will be the most sensitive to volatility. The father out you go the more volatility you will be buying. Thats why they can be very profitable in a low volatility environment or approaching earnings. As time decay works on your short strike then it becomes even more volatile. Timing is everything in a calendar because you have to know what price to pay for the underlying for the spread.

Take Rimm for example. Watch an at the money spread for a month three times a day and record the cost of the calendar spread. You will soon learn what a good price is.

The other thing I normally do is always use the puts. Why? Because if the market has a huge down draft the volatility of the back month puts will expand faster than calls. You also will not be subject to dividend risk if you equity pays a dividend, its near expiration, and you have a deep in the money call calendar. Your short stock on your call calendar deep in the money and you likely will be exercised, not that its a big deal but it does cost for the assignment but moreover you have to pay the dividend to the person who called you out.

I would urge you to get some graphing software too so you can model these option stradegies.

As to profit I normally take 20-25% on my calendar option plays.

I use tos and am able to view risk profiles of p/l, delta, gamma, theta, and vega. I like your reasoning for using puts over calls because I know I don't want to deal with the assignment. Structuring the trade a little otm when placing it seems like a good idea so that you can skip assignment of short strikes.

 

[vmora]

Quote from Roark:

1. I believe the reason call calendars are preferred in a rising market is because you can set up the calendar by shorting a front month option and buying a later expiration call. Hopefully thereafter, the front month option will expire worthless leaving you long a call in a rising market so that your upside is now unlimited. Reverse that for puts.

2. You can play around with different strikes and expirations to try and get the break even points to encompass your desired range. For example, try a call calendar composed of short RIMM1116G57.5; expiration 16 Jul 2011 and long RIMM1117I57.5; expiration 17 Sep 2011. Break even is at 51.37 and 65.37. That gives you some more breathing room at the lower end of your desired range and is almost dead on at the upper end.

With respect to taking profits, I suppose if it was more than 50% of max profit I would consider cashing in. That would depend though on the spread between bid and ask. It could be an illiquid situation for which it is better to let it ride. My main concern wouldn't be what to do in the event of a profit, but what to do in the event of a loss. Profits tend to take care of themselves. It's the losses that bother me.

ps: pberndt seems to know more than me. You're probably better off taking his advice.

1. that is a good plan, it just seems a little difficult. I'll have to work on my timing

2. i suppose i must do what you say here but it's probably worth it since i only need 2 contracts for the spread instead of 3 or 4.

yours and pberndt's profit taking strategy both sound reasonable. thank you.

 

[sonoma]

Quote from Roark:

I will attempt to answer your first two questions, not because I'm an expert, but because I am interested in the subject matter and want to learn.

(2) You can accurately define your break even points with a calendar.

You won't be able to define your break-even points because you can't predict vol in the deferred month. You can make an educated guess, but don't confuse that with the known risk of a fly.

 

[vmora]

Quote from eldorado1:

Hi juice,
I started using iron condor 4 months ago. Successful so far in every month. I think it's a good strategy if played carefully and adjusted every once an a while. Please share some details about your losing trade, I would like to know why it went so wrong.
I use thinkorswim too and I always try to make sure the delta is more or less natural. It's easy to keep track on Greeks with this broker.

I was just looking through the thread and noticed that I didn't reply to you, sorry. What happened to me was that I sold spreads to close to the money and they went against me. I was sold by the higher premium and thought that the underlying could not go against me. Also, I was compounding credits on weeklies until I wasn't. I got hurt by the accelerating gamma of ATM options near expiration. Since then, I am trying to be less risky.

 

[vmora]

Quote from sonoma:

You won't be able to define your break-even points because you can't predict vol in the deferred month. You can make an educated guess, but don't confuse that with the known risk of a fly.

Very true. I've been seeing this when I apply vol and day steps to the risk profile.

 

[trader46]

"I have never in my life met a person who built equity buying options" - Alexander Elder

 

[Roark]

He wrote a book, so it must be true. Great traders don't trade; they write books, blog, and teach.

 

[turkeyneck]

Quote from pberndt:

I would start out with simple directional credit spreads, calendar spreads and cover calls or cash secured puts. Going into more advanced things like condors, strangle swaps, back-ratios and various butterflies takes alot of position management and capital to do it.

Why is credit spread preferred over debit spread?

 

[mushinseeker]

should really meet more people.

Credit and debit spreads are similar. Buying call vert is same as selling put vertical. I said similar not the same, the subtle difference is inthe risk reward and the gamma esp near expiration.