Calendar spreads

Calendar spread is...

  • Very good strategy

    Votes: 37 62.7%

  • Good for moving sideways markets only

    Votes: 31 52.5%

  • Too little profit strategy

    Votes: 15 25.4%

  • Losing strategy

    Votes: 8 13.6%
  • Total voters
    59
C

ChrisM

I have just started trading them few months ago. Looks good so far but not extremely impressive, which seems to be realistic.

This strategy needs a lot of time to see if it works. Does anybody can share somewhat longer experience ?

Also, interesting combination would be mixing this strategy with vertical spreads (vertical/horizontal). Does anybody trade this ?
 
I did these all the time in college. Just make sure iv isn't shrinking too quickly as that long side has to be worth enough to be profitable.
 
Chris,

Combining calendar and vertical spreads (creating a diagonal spread) can be great in a rising volatility market. The trade is both vega positive and theta positive (the latter being a virtual must in my book). Though many will disagree with me, I view a volatility skew as not being essential to the success of the trade. Also, just make sure you have more than one month between strikes, which will give you an opportunity to write another option against your long option once the near term has expired and will also enhance the theta positive nature of the trade. Lastly, you can diagonalize both sides of an iron condor, which I've done in the past and which can be an interesting trade.

Regards,

HD
 
I was doing these until recently on the indexes...but the volatility drop just sucked the profit out of them on a monthly basis.

HelloDollars,

I'm no options genius...Since these are vega positive, have you ever heard of someone combining another range-bound options strategy with a calendar spread to get vega neutral? Just something I've been thinking about. Then you're making a pure range bet and getting rid of implied volatility exposure. Basically you make all your money by spreading theta...

MYD
 
MYDemaray,

I agree. Straight calendar spreads, or any vega positive trades, haven't fared well the past 5 months. But, in response to your question, there are ways to play theta while being vega neutral or vega negative. With regard to the latter, you could always do my favorite trade -- the iron condor -- which is simply selling a strangle and buying a further out of the money strangle, all with the same expiration. As you can imagine, the trade has worked very well the last 3 months given the extremely narrow range we've been in.

But with regard to your specific question as to how to be theta pos and vega neutral, one way that comes to mind is to ratio and diagonalize both a call and a put calendar spread by selling more near term closer to the money options than the longer term OTM you buy. The profit graph is similar to a butterfly spread though it's a credit trade and has unlimited risk in either direction. Finding the right combinations to result in vega neutrality just takes a little math.

However, the problem with that position, in addition to the unlimited risk aspect, and the problem with most vega neutral positions I believe, is that they become vega positive (or negative) pretty quickly simply due to the passage of time. Thus, to maintain vega neutrality, you'll be forced to make frequent adjustments to the position, which can get costly.

Hence, my personal preference is to play the ranges, sell theta and live with some exposure to vega one way or the other.

Hope that helps.

Regards,

HD
 
Quote from Hello_Dollars:

Chris,

Combining calendar and vertical spreads (creating a diagonal spread) can be great in a rising volatility market. The trade is both vega positive and theta positive (the latter being a virtual must in my book). Though many will disagree with me, I view a volatility skew as not being essential to the success of the trade. Also, just make sure you have more than one month between strikes, which will give you an opportunity to write another option against your long option once the near term has expired and will also enhance the theta positive nature of the trade. Lastly, you can diagonalize both sides of an iron condor, which I've done in the past and which can be an interesting trade.

Regards,

HD
More...

Agree with vola skewness. Works when you initiate position, but then you have to switch to next month after expiration nad waiting for favorable volatility skew would be mistake, while holding long option.
I was thinking about diagonalizing, thx.

If so, can I ask why don`t you trade them now ?
 
Chris,

I agree about not writing against the long option again when the near term expires. As I said, I typically like to have 2 months between my short and long options. Thus, at near term expiration, I typically close out the long option and evaluate putting on an entirely new spread.

As to why I don't have any diagonals on at the moment, it's simply because, despite all my expectations, volatility keeps going lower. While everything tells me to be long volatility here, particularly as we approach the traditionally higher vol Sept-Oct period, I continue to be confounded by the market's resiliance and complacency. At the same time, for each of the past several days I've come very close to pulling the trigger and converting the bull put spread side of my September XEO iron condor into a Sept-Nov diagonal. But since I believe in reversion to the mean when it comes to this stuff, I'll probably do it before the month is out on at least a portion of my position.

Regards,

HD
 
Quote from Hello_Dollars:

MYDemaray,

I agree. Straight calendar spreads, or any vega positive trades, haven't fared well the past 5 months. But, in response to your question, there are ways to play theta while being vega neutral or vega negative. With regard to the latter, you could always do my favorite trade -- the iron condor -- which is simply selling a strangle and buying a further out of the money strangle, all with the same expiration. As you can imagine, the trade has worked very well the last 3 months given the extremely narrow range we've been in.

But with regard to your specific question as to how to be theta pos and vega neutral, one way that comes to mind is to ratio and diagonalize both a call and a put calendar spread by selling more near term closer to the money options than the longer term OTM you buy. The profit graph is similar to a butterfly spread though it's a credit trade and has unlimited risk in either direction. Finding the right combinations to result in vega neutrality just takes a little math.

However, the problem with that position, in addition to the unlimited risk aspect, and the problem with most vega neutral positions I believe, is that they become vega positive (or negative) pretty quickly simply due to the passage of time. Thus, to maintain vega neutrality, you'll be forced to make frequent adjustments to the position, which can get costly.

Hence, my personal preference is to play the ranges, sell theta and live with some exposure to vega one way or the other.

Hope that helps.

Regards,

HD
More...

HD,

Thanks for the great response...this was very helpful!

MYD
 
HD, I also am amazed at the resiliency of this market's shrinking volatility. The VIX is hitting a new low every few days. Fortunately, we just kept on selling it and it has worked well.

It appears very close to the summer of two years ago just before 9/11.
 
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