Calendar Spreads

M

maninjapan

Ok guys, last time I asked for some help on Condors I got a heap of help. ( thanks everyone who contributed). Im back again, this time asking for some insights on Calendar spreads. I understand the basic theory of them, but am yet to have much real practical experience trading them.
As a drop in Volatility will hurt the spread (for a long calendar) I should be looking for underlyings that have relatively low volatility (compared to historical) or at least not trending down as well as a relatively stable price range.
On top of that I want a positive IV skew to the front month. Are there any rules of thumb as to 'the right amount' of skew? Obviously too much would indicate something going on that may cause the price to jump and hurt the spread.
Are there any other points to consider when searching for Calendar spread candidates?

Thanks.
 
Quote from maninjapan:


Are there any other points to consider when searching for Calendar spread candidates?

Thanks.
More...

Calendars are directional plays because the spread moves to it's maximum value as the underlying approaches the calendar's strike.

Thus, you can choose OTM spreads as a directional play.

ATM spreads cost the most and, obviously, you are predicting lack of market movement.

Calendars can be combined with iron condors to produce double diagonal spreads.

Mark
 
Mark, thanks for that that is one strategy I had considered. What is the advantage of setting it up that way, over a regualr Condor spread?
 
Quote from maninjapan:

Mark, thanks for that that is one strategy I had considered. What is the advantage of setting it up that way, over a regualr Condor spread?
More...

It's NOT that there is an advantage.

It's that if you LIKE the idea of doing a calendar spread, you can combine it with an iron condor.

I <i>only</i> trade diagonals when I consider IV to be low. Who knows when that will occur again?

But if YOU want to do a calendar, I was just pointing out that you can combine it with an iron condor.

Mark
 
Right, thanks Mark. Im interested in learning more about calenders but I keep coming back to the conclusion that now is jsut not the time for them. Im sure if you look hard enough there are candidates for any strategy, but woudl you agree with that generaly?
 
Quote from maninjapan:

Right, thanks Mark. Im interested in learning more about calenders but I keep coming back to the conclusion that now is jsut not the time for them. Im sure if you look hard enough there are candidates for any strategy, but woudl you agree with that generaly?
More...

Yes.

Different strategies do better under different market conditions. Calendars do better when IV is expanding. But, it's still a directional play.

Mark
 
Quote from maninjapan:


Are there any other points to consider when searching for Calendar spread candidates?
More...

Proceed with caution. IV crush will brutalize your returns. You have a little more flexibility with a diagonal or double diagonal, but in present market conditions that trade is vulnerable too.
 
Jones, yeah I hear you. thats kind of the theory I was running with. Theres a time and place for every strategy and for Calendars, now is not it (although Im sure there are always exceptions)
 
I'm curious - if the idea is to play calendar spreads when IV is expanding would not have most equity spreads put on in Sept/ early Oct of 08 been crushed once the market fell off? Surely IV must've been ramping up during that time period.

I made decent coin on a calendar spread I put on WFT in December - sold the Feb 12.50 strike calls and bought the corresponding May calls. I'd be interesting in trying some more - an experienced trader I know told me that calendar calls are frequently profitable. I'm curious have some of you backtested option strategies? What kind of software is required to do that?
 
You must log in or register to reply here.
Back
Top