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Calendar spreads
- Thread starter lasner
- Start date
I use calendar spreads and it is really a theta game where you can collect the time value, and if everything goes you way the hole sold premium, given that the short will expire under the strike. If you sell against a longer term security, you can roll the short each month and hopefully generate income each month that aggregated will be more than you initially paid for the long. Normally you have the same strike prices for the long and short options, but I like to trade deep in the money for the long and at the money or higher for the short, this approach seems to give the best theta and delta values. You will be looking out for big moves in either direction.
Calendar spreads are highly profitable in :
1. Price is neautral or price stays around your strike price at expiration.
2. Volatality is rising and less volatality skew. i.e., front month and back month trade with same volatality.
Most people say you won't loose more than what you paid in calendar spread but there is an exception, if there is no one to buy you long and you are deep in the money, you may loose more than what you paid.
There is a webcast on OIC site about calendar spreads (look for Time spreads)
http://www.optionseducation.org/seminars/webcasts.jsp
This PDF gives very good info on calendar spreads as well:
http://files.sheridanmentoring.com/download/documents/articles/JS_CALENDAR.pdf
option strategist book by Larry McMillan gives some basic info on calendar spreads but you can find tons of info on calendar spreads online. Just search optionetics forums, elite trader threads etc...
Best way to learn in my opinion is paper trade...
1. Price is neautral or price stays around your strike price at expiration.
2. Volatality is rising and less volatality skew. i.e., front month and back month trade with same volatality.
Most people say you won't loose more than what you paid in calendar spread but there is an exception, if there is no one to buy you long and you are deep in the money, you may loose more than what you paid.
There is a webcast on OIC site about calendar spreads (look for Time spreads)
http://www.optionseducation.org/seminars/webcasts.jsp
This PDF gives very good info on calendar spreads as well:
http://files.sheridanmentoring.com/download/documents/articles/JS_CALENDAR.pdf
option strategist book by Larry McMillan gives some basic info on calendar spreads but you can find tons of info on calendar spreads online. Just search optionetics forums, elite trader threads etc...
Best way to learn in my opinion is paper trade...
Quote from NHS:
Normally you have the same strike prices for the long and short options, but I like to trade deep in the money for the long and at the money or higher for the short, this approach seems to give the best theta and delta values. You will be looking out for big moves in either direction.
What you have there is actually a "diagonal spread". So with your combo of deep ITM + ATM/OTM options, any price moves towards your short strikes won't hurt you.
Quote from skyasa:
Most people say you won't loose more than what you paid in calendar spread but there is an exception, if there is no one to buy you long and you are deep in the money, you may loose more than what you paid.
I'm sure a market maker would be willing to buy your longs off you....if you offer a low enough price.
My problem with calendars is that if you get exercised....you can lose your entire debit!
Quote from NeuromanceR:
My problem with calendars is that if you get exercised....you can lose your entire debit!
I am not sure what you mean here?
It is only relevant for the short leg of the position. If you get exercised before expiration day, you just sell a new short leg in the same expiration cycle and strike, and use the cash-income to buy stocks to give to the "old" short leg contract holder. If the spread and time value is acting normal you actually make a small amount of cash on this?
Or maybe use the given opportunity to make a different position.
Quote from NHS:
I am not sure what you mean here?
It is only relevant for the short leg of the position. If you get exercised before expiration day, you just sell a new short leg in the same expiration cycle and strike, and use the cash-income to buy stocks to give to the "old" short leg contract holder. If the spread and time value is acting normal you actually make a small amount of cash on this?
Or maybe use the given opportunity to make a different position.
I forgot to mention that this is assuming that there is no extra money in your trading account.
Let's work with an example:
Position is an "OTM call calendar debit spread" with strikes of $43.
Stock price is $40.
Months are March for the longs, Feb for the shorts.
Let's say the stock goes to $45 by Feb and you get exercised early for some reason.
What would you do?
Quote from NeuromanceR:
I forgot to mention that this is assuming that there is no extra money in your trading account.
Let's work with an example:
Position is an "OTM call calendar debit spread" with strikes of $43.
Stock price is $40.
Months are March for the longs, Feb for the shorts.
Let's say the stock goes to $45 by Feb and you get exercised early for some reason.
What would you do?
Letâs also say that the we are dealing with 1 option that is traded at IV 50% and I assume from your example that I get exercised before exp in February, letâs say 1th February and the stock price is than 45$, and the agreed strike is 43$. So for some strange reason I get exercised 18 days before exp.
The current prices should be something like (stock 45$):
Date Type Type Strike Price
Feb SHORT CALL 43$ 3,06$
Mar LONG CALL 43$ 4,17$
Given that I still like the position Iâll sell new calls at strike 43$ at 3,06$ given me 300$ in cash. Iâll parallel buy 100 stocks for 4500$. Iâll get back 4300$ when I deliver and all in all I made (4500$-4300$+300$) 100$.
If you do not have the possibility to finance the cash amount in the short time from you sell new short, buy the stock, delivery the stock and get back the money from the strike difference â yes than you have a problem.
Quote from NHS:
If you do not have the possibility to finance the cash amount in the short time from you sell new short, buy the stock, delivery the stock and get back the money from the strike difference â yes than you have a problem.
Yep. Calendar spreads are NOT suitable for under-capitalised, leverage junkies!
I don't think basic calendars are a good way to attempt to generate income. In order to get anywhere with them you have to have them finish reasonably close to the strike at near term expiration and predicting that is as hard as predicting whether a stock will go up or down.Quote from lasner:
I was wondering if anyone is using calendar spreads and could give some advice. I'm looking for low risk ways to add income. If anyone could recommend a good book on calendar spreads that would be great.
And the textbook answer that calendars are good for acquiring the far month at a lower cost is even harder since now you need the aforementioned good expiration and then the underlying has to move in your direction.
Calendars are very useful but like most strategies, you still have to get the direction (or lack thereof) correct.