Calendar spreads

[Maverick74]

Quote from ChrisM:



Mav,

I was mostly talking about short calendars, but additionally referring to few others. But let`s use it as an example:
how do you get unlimited profit potential trading calendar shorts ?
If you scalp gamma to rent vega for free (as you wrote) you fade the moves by trading against the market, right ? So, once you get breakout how do you profit then ? If by changing the rules and staying long delta then it is pure speculation. On other hand if you stay neutral then the profit is not unlimited ?

Chris,

Yeah, I guess I didn't explain to you exactly how I trade short calendars. The way I trade short calendars is pretty simple. They are generally really short trades. Most of them I put on for one day.

Let me give an example. Let's the vol on IBM has been running up going into earnings from 30 to 45 in like 2 weeks which is a pretty big move for IBM. I would put the short calendar on the day before they reported. I would take it off either at the open the next day or at the close the next day.

What I am looking for here are two things. One, I am looking for a gap move in IBM on the numbers which happens about 80% of the time. This is good for me since I am long the front month and have a lot of gamma here. Two, I am looking for a Vol implosion on the back month. Say from 45 to 35 where I am short vega back there. So in a perfect situation, IBM would come out with numbers, good or bad, gap down 5 pts the next day and the vol would come in 10 ticks.

Since I am putting this spread on for a credit here, the purpose is to earn the credit and possibly expand it. When done right, this trade can be a huge moneymaker with very very little risk. I mean the risk to reward on this trade is sick. Because I am only holding for it for day the return on equity is just monstrous. The big risk you have on short calendars is with your negative vega on the back month. But since I am only holding this for a day, that's a non factor. Also the odds of me getting that gap move are huge which is perfect for my long gamma.

The worst case scenario for me is that numbers come out, the stock opens flat and the vol doesn't react although that would be very odd if the vol had a huge runnup and didn't come in after a flat open. Really though, I can't talk enough about the risk to reward on this trade. It's really what options trading is all about. The scary thing is you could put on 500 of these a year and maybe lose money on 10 of them. Of course a lot of these will be break evens which is not a big deal. But it's really hard to get hurt on these trades. And I mean really hard, although I guess as a disclaimer I should say that I bet somebody on these boards could find a way to get hurt. LOL.

 

[tikipoki]

The disclaimer is a simple one: TRADING IS ZERO SUM. For every contract you buy, someone sells one, and for every contract you sell, someone buys one. No money is "MADE" its only transferred.

Of course, I dont quite know how to GIVE people money yet, and dont plan to learn it quickly, either

Tiki

Quote from Maverick74:



Chris,

Yeah, I guess I didn't explain to you exactly how I trade short calendars. The way I trade short calendars is pretty simple. They are generally really short trades. Most of them I put on for one day.

Let me give an example. Let's the vol on IBM has been running up going into earnings from 30 to 45 in like 2 weeks which is a pretty big move for IBM. I would put the short calendar on the day before they reported. I would take it off either at the open the next day or at the close the next day.

What I am looking for here are two things. One, I am looking for a gap move in IBM on the numbers which happens about 80% of the time. This is good for me since I am long the front month and have a lot of gamma here. Two, I am looking for a Vol implosion on the back month. Say from 45 to 35 where I am short vega back there. So in a perfect situation, IBM would come out with numbers, good or bad, gap down 5 pts the next day and the vol would come in 10 ticks.

Since I am putting this spread on for a credit here, the purpose is to earn the credit and possibly expand it. When done right, this trade can be a huge moneymaker with very very little risk. I mean the risk to reward on this trade is sick. Because I am only holding for it for day the return on equity is just monstrous. The big risk you have on short calendars is with your negative vega on the back month. But since I am only holding this for a day, that's a non factor. Also the odds of me getting that gap move are huge which is perfect for my long gamma.

The worst case scenario for me is that numbers come out, the stock opens flat and the vol doesn't react although that would be very odd if the vol had a huge runnup and didn't come in after a flat open. Really though, I can't talk enough about the risk to reward on this trade. It's really what options trading is all about. The scary thing is you could put on 500 of these a year and maybe lose money on 10 of them. Of course a lot of these will be break evens which is not a big deal. But it's really hard to get hurt on these trades. And I mean really hard, although I guess as a disclaimer I should say that I bet somebody on these boards could find a way to get hurt. LOL.

 

[ChrisM]

Quote from Maverick74:



Chris,

Yeah, I guess I didn't explain to you exactly how I trade short calendars. The way I trade short calendars is pretty simple. They are generally really short trades. Most of them I put on for one day.

Let me give an example. Let's the vol on IBM has been running up going into earnings from 30 to 45 in like 2 weeks which is a pretty big move for IBM. I would put the short calendar on the day before they reported. I would take it off either at the open the next day or at the close the next day.

What I am looking for here are two things. One, I am looking for a gap move in IBM on the numbers which happens about 80% of the time. This is good for me since I am long the front month and have a lot of gamma here. Two, I am looking for a Vol implosion on the back month. Say from 45 to 35 where I am short vega back there. So in a perfect situation, IBM would come out with numbers, good or bad, gap down 5 pts the next day and the vol would come in 10 ticks.

Since I am putting this spread on for a credit here, the purpose is to earn the credit and possibly expand it. When done right, this trade can be a huge moneymaker with very very little risk. I mean the risk to reward on this trade is sick. Because I am only holding for it for day the return on equity is just monstrous. The big risk you have on short calendars is with your negative vega on the back month. But since I am only holding this for a day, that's a non factor. Also the odds of me getting that gap move are huge which is perfect for my long gamma.

The worst case scenario for me is that numbers come out, the stock opens flat and the vol doesn't react although that would be very odd if the vol had a huge runnup and didn't come in after a flat open. Really though, I can't talk enough about the risk to reward on this trade. It's really what options trading is all about. The scary thing is you could put on 500 of these a year and maybe lose money on 10 of them. Of course a lot of these will be break evens which is not a big deal. But it's really hard to get hurt on these trades. And I mean really hard, although I guess as a disclaimer I should say that I bet somebody on these boards could find a way to get hurt. LOL.

Mav,

thanks for the explanation. It clears everything. I actually have tried to fade such moves by using backspreads in the beginning, but recently switching into vertical/horizontal spreads.
Your technique is more sophisticated.
The biggest issue concerning such moves for me was always finding good candidates for it. I have tried number of methods following certain data but it did not work, or it worked, but not in the satisfactory level.
You mentioned before about searching stocks around their 52 weeks highs. It certainly helps. Another method was discovered coincidentally (while hunting for option trading opportunities) and it was spotting those, with extreme vola readings using standard services. Most of them awaiting big news or decision coming up and at most of the times in one day everything is clear. This was my case with IGEN some time ago in which I had opposite position (long calendar) and that is why I started this thread. LOL

 

[Maverick74]

Quote from ChrisM:



Mav,

thanks for the explanation. It clears everything. I actually have tried to fade such moves by using backspreads in the beginning, but recently switching into vertical/horizontal spreads.
Your technique is more sophisticated.
The biggest issue concerning such moves for me was always finding good candidates for it. I have tried number of methods following certain data but it did not work, or it worked, but not in the satisfactory level.
You mentioned before about searching stocks around their 52 weeks highs. It certainly helps. Another method was discovered coincidentally (while hunting for option trading opportunities) and it was spotting those, with extreme vola readings using standard services. Most of them awaiting big news or decision coming up and at most of the times in one day everything is clear. This was my case with IGEN some time ago in which I had opposite position (long calendar) and that is why I started this thread. LOL

Chris,

Finding good candidates is not as hard as you might think. You can scan for vol on websites like ivolatility.com or many other software scanners out there and also scan for news. Earnings announcements are really easy obviously, but even upcoming FDA meetings, shareholder meetings, analyst meetings, you name it.

You are not going to find the perfect play, the key is, like anything else is to do a lot of them. Since I would only hold these for a day. I guess in theory I could do about 1,000 to 5,000 a year. Make a little bit on each and you have yourself a nice bank account. Remember even when vol is really low, it drops off after earnings announcements. You don't need much, catch a couple ticks of vol and catch some deltas and you made a very high percentage return on your money for a one day hold.

You can look for crazy stocks, news stocks, stocks at 52 week highs, stocks with high vol, stocks with huge vol runnups, I could go on and on. I could probably come up with a list of 100 to do this week and it's not even earnings season! Don't get too wrapped up in finding the perfect candidate. It doesn't exist. In fact you can design a program on excel that will allow yout to research every stock on both the NYSE and nasdaq and calculate the avg price move the day following earnings and create a formula to pick plays based solely on that.

Good luck!

 

[ChrisM]

Quote from Maverick74:



Chris,

Finding good candidates is not as hard as you might think. You can scan for vol on websites like ivolatility.com or many other software scanners out there and also scan for news. Earnings announcements are really easy obviously, but even upcoming FDA meetings, shareholder meetings, analyst meetings, you name it.

You are not going to find the perfect play, the key is, like anything else is to do a lot of them. Since I would only hold these for a day. I guess in theory I could do about 1,000 to 5,000 a year. Make a little bit on each and you have yourself a nice bank account. Remember even when vol is really low, it drops off after earnings announcements. You don't need much, catch a couple ticks of vol and catch some deltas and you made a very high percentage return on your money for a one day hold.

You can look for crazy stocks, news stocks, stocks at 52 week highs, stocks with high vol, stocks with huge vol runnups, I could go on and on. I could probably come up with a list of 100 to do this week and it's not even earnings season! Don't get too wrapped up in finding the perfect candidate. It doesn't exist. In fact you can design a program on excel that will allow yout to research every stock on both the NYSE and nasdaq and calculate the avg price move the day following earnings and create a formula to pick plays based solely on that.

Good luck!

Mav,

I was thinking about IVolatility and CoveredCalls, thanks.
But for certain scanning I already have some codes working on TS. Then the question comes how many of them to follow and I am little reserved about following these softs downloading myriad of bytes of data every night. After years of doing this I say no more as much as possible. LOL
But this is no really big problem. The catch is how tu use it in smart way. I have tried few things but many spreads had certain limitations not making me comfortable with what I was trading.
My priority is the same as yours - risk control. As long as I can set it up this way, I may try hundreds of things.

 

[ChrisM]

Quote from Maverick74:



Chris,

Yeah, I guess I didn't explain to you exactly how I trade short calendars. The way I trade short calendars is pretty simple. They are generally really short trades. Most of them I put on for one day.

Let me give an example. Let's the vol on IBM has been running up going into earnings from 30 to 45 in like 2 weeks which is a pretty big move for IBM. I would put the short calendar on the day before they reported. I would take it off either at the open the next day or at the close the next day.

What I am looking for here are two things. One, I am looking for a gap move in IBM on the numbers which happens about 80% of the time. This is good for me since I am long the front month and have a lot of gamma here. Two, I am looking for a Vol implosion on the back month. Say from 45 to 35 where I am short vega back there. So in a perfect situation, IBM would come out with numbers, good or bad, gap down 5 pts the next day and the vol would come in 10 ticks.

Since I am putting this spread on for a credit here, the purpose is to earn the credit and possibly expand it. When done right, this trade can be a huge moneymaker with very very little risk. I mean the risk to reward on this trade is sick. Because I am only holding for it for day the return on equity is just monstrous. The big risk you have on short calendars is with your negative vega on the back month. But since I am only holding this for a day, that's a non factor. Also the odds of me getting that gap move are huge which is perfect for my long gamma.

The worst case scenario for me is that numbers come out, the stock opens flat and the vol doesn't react although that would be very odd if the vol had a huge runnup and didn't come in after a flat open. Really though, I can't talk enough about the risk to reward on this trade. It's really what options trading is all about. The scary thing is you could put on 500 of these a year and maybe lose money on 10 of them. Of course a lot of these will be break evens which is not a big deal. But it's really hard to get hurt on these trades. And I mean really hard, although I guess as a disclaimer I should say that I bet somebody on these boards could find a way to get hurt. LOL.

Mav,

After doing some researches I come to the point which is basic crossroads for us: do you trade on the floor ?

Otherwise holding such position (short calendar) for a day will not give you enough room to pay for the spread.

 

[Maverick74]

Quote from ChrisM:



Mav,

After doing some researches I come to the point which is basic crossroads for us: do you trade on the floor ?

Otherwise holding such position (short calendar) for a day will not give you enough room to pay for the spread.

No, I do not trade options on the floor. In order for the short calendar to work, you need a gap in the underlying or vol implosion on the back month or both. Something to add here, your profit on these trades are generally really small. Maybe 1/2 pt to 2 pts at the most. That's after paying the spread.

However, you need to look at this from a risk to reward perspective. Your risk on this trade is very very small since you are holding it for a day. In many cases you will be buying back your credit spread for the same price you sold it for. The key here is you will never lose your house. You will never blow up your trading account. You will never have a margin call. You will never end your trading career. As someone who has traded a lot of options, I would say the those things probably happen to 95% of all option traders and that might be a conservative estimate. Once you begin to understand that, and you probably won't until it happens to you, you will see how this kind of strategy is so valuable. Small profits yes, but longevity, well, priceless.

I also mentioned that you want to do many of these. You are not going to get rich overnight. But if you did 500 to 1000 of these over the year, well, you would certainly be the envy of all your friends and neighbors. Even a small 1/4pt profit on 1000 calendars with 100 lot positions is 2.5 million dollars in profit!!!!!!
I have done short calendars for 1 to 2 pts on a regular basis. So 1/4 pt is very conservative.

I hope you have a better understanding now.

 

[ChrisM]

Quote from Maverick74:



No, I do not trade options on the floor. In order for the short calendar to work, you need a gap in the underlying or vol implosion on the back month or both. Something to add here, your profit on these trades are generally really small. Maybe 1/2 pt to 2 pts at the most. That's after paying the spread.

However, you need to look at this from a risk to reward perspective. Your risk on this trade is very very small since you are holding it for a day. In many cases you will be buying back your credit spread for the same price you sold it for. The key here is you will never lose your house. You will never blow up your trading account. You will never have a margin call. You will never end your trading career. As someone who has traded a lot of options, I would say the those things probably happen to 95% of all option traders and that might be a conservative estimate. Once you begin to understand that, and you probably won't until it happens to you, you will see how this kind of strategy is so valuable. Small profits yes, but longevity, well, priceless.

I also mentioned that you want to do many of these. You are not going to get rich overnight. But if you did 500 to 1000 of these over the year, well, you would certainly be the envy of all your friends and neighbors. Even a small 1/4pt profit on 1000 calendars with 100 lot positions is 2.5 million dollars in profit!!!!!!
I have done short calendars for 1 to 2 pts on a regular basis. So 1/4 pt is very conservative.

I hope you have a better understanding now.

Mav,

thank you for the explanation. I have been too long in this biz to expect too much from the market. Actually if I collect too high profits I usually becomes suspicious and check it for errors.
I am asking such question because I was just comparing high vola stocks vs. results on the news day.
One of my picks was PCG. Maybe wrong candidate ? But opening on monday and closing on Tuesday would loose 1-2 points, so if you are wrong, you do not break even.
Also I was thinking about using your strategy for hedging my flies. I loose on them only if market makes significant move in one direction without average corrections. This is exactly the scenario when short calendars make money, right ? But under normal circumstances my flies have to pay for losing calendars positions.
Also, 1/4 point profit is a lot of money if the losses are relatively rare and not higher than profits. That is all about.

Good luck

 

[Maverick74]

Quote from ChrisM:



Mav,

thank you for the explanation. I have been too long in this biz to expect too much from the market. Actually if I collect too high profits I usually becomes suspicious and check it for errors.
I am asking such question because I was just comparing high vola stocks vs. results on the news day.
One of my picks was PCG. Maybe wrong candidate ? But opening on monday and closing on Tuesday would loose 1-2 points, so if you are wrong, you do not break even.
Also I was thinking about using your strategy for hedging my flies. I loose on them only if market makes significant move in one direction without average corrections. This is exactly the scenario when short calendars make money, right ? But under normal circumstances my flies have to pay for losing calendars positions.
Also, 1/4 point profit is a lot of money if the losses are relatively rare and not higher than profits. That is all about.

Good luck

Chris, give me a more specific example of what you are trying to do. When you are short a calendar you are taking in a credit. Your goal is to capture some of that credit. So If I sell the calendar for an 8 pt credit, I would like to buy it back for 7 1/2, 7 3/4 or 7 or even less if I can. If you do this spread correctly, you should never lose 2 pts. In fact I would call 2 pts a complete disaster. The only way you can lose 2 pts is if the stock opened flat the next day and the vol on the back month went vertical which would be awfully strange considering the stock opened flat. See you have two things here that are keeping you from losing a lot of money.

If the stock opens flat the next day then this is bad for your front month options which you are long. However, if that happens, and you sold really high vol on the back month then the premium on the back month should have imploded and kept you from losing money.

The other scenario, if the stock has really big news and lets say it gaps down 5 pts and the vol on the back month goes up therefore hurting your short vol position there, you would more then make up for that from the money you made by being long the front month premium.

So it's really odd that you could lose 2 pts on any spread. But give me specific numbers and I will look at it more carefully. Like I said before, you want to do as many of these as you can since a great majority of them will be even trades. You want to catch as many gaps as you can. I hope this helps.

 

[riskreward]

Thanks to Mav for posting the short calendar idea. I don't know if this has been covered already but the brokerages I called don't allow any spread margin for this position. Anybody know a brokerage that does this? I'm guessing Green Tree Trading but anybody know of any other firms? This would be a great strategy to put on as long as some firm understood the risks and didn't consider it a naked sell.