Calendar spreads

[ChrisM]

Quote from Maverick74:



Chris,

You can hold a short calendar as long as you want. Just keep in mind that you have short theta on that front month. So you can either scalp the gamma or take a delta position to pay for the time decay. It's just as viable. In fact it can be very profitable on the long side. For example, looking for stocks that have come in really hard and have had vol spikes. By putting on the short cal you can basically hold a long deltas position and profit from the decrease in vol on the way back up. Like I have said before, there are a million ways to do these things.

Mav,

I was just exactly wondering whether such spread would give some other opportunities in case of flat/losing one day trade.
Also long side works well for indices, thanks.

While there are no secrets for you, maybe you may recommend some news service ? These things were never my favorites but job is a job. LOL

So far using CBS, Bloomberg, Yahoo, IB.

 

[Maverick74]

Quote from ChrisM:



Mav,

I was just exactly wondering whether such spread would give some other opportunities in case of flat/losing one day trade.
Also long side works well for indices, thanks.

While there are no secrets for you, maybe you may recommend some news service ? These things were never my favorites but job is a job. LOL

So far using CBS, Bloomberg, Yahoo, IB.

What do you mean by news service? You mean to get stock ideas? Seriously yahoo is great for all the earnings as is briefing. Other then that, you can always scan for high vol stocks and then go back and search the news and see if you can find why people are so afraid and if there is one particular event approaching that you might be able to capitalize on.

 

[Maverick74]

Quote from ChrisM:



Mav,

Thank you again for the detailed explanation.

let`s make MRVL - high volatility (one of the top on IVolatility list) on Tuesday had third quarter fiscal results released on Wednesday.

Following are quotes (bid/ask) on Tuesday close:

Call Nov40 - 275/295
Put Nov40 - 40/55
Call May40 - 730/770
Put May40 - 370/400

And quotes on Wednesday close:

Call Nov40 - 260/285
Put Nov40 - 65/80
Call May40 - 720/760
Put May40 - 390/420

So opening short calendar straddle on Tue would be $750 credit and closing on Wed comes to -$850 debit resulting in $100
(1 point) loss.
But once profits in this strategy are about fraction of the point, reward/risk ratio would not look impressive ?

Chris, something else I forgot to mention. You should never do these with less then 2 weeks to expiration. You should use the next month for your front month in this case. With this MRVL example you picked options that were expiring in 3 days. That's a lot of theta to lose even just for one day. You always want to have at least 3 weeks on the front month position in which your long. Preferably 4 to 6 weeks. Sorry I didn't make that clear. You don't want your theta to wipe out all your profits. Hope this helps.

 

[Hello_Dollars]

Quote from riskreward:

Thanks for the response. I read Natenburg last night and things are clearer now. I was planning to use some hard and fast rule like IV had to be some percent above the average or be in some percentile before I put on these spreads.

Any idea of how much capital would be appropriate for these spreads? 25000 to start with?

Riskreward,

It really depends on your risk tolerance and how much size you're comfortable doing per spread. But as with all trading, the more capital, the better. It may be helpful to approach credits using certain guidelines, such as requiring a risk:reward ratio per spread of 2:1 or 1:1. Then just make sure you spread the capital allocated to this strategy over a sufficient number of positions to diversify your risk while keeping the portfolio manageable. Lastly, you should keep in mind that, while these positions typically have a probability of profit of 60%-70%, one losing trade if allowed to go to max loss can wipe out several hard-earned winning ones. Hence, it will be essential to develop and enforce a strict stop-loss regimen as part of your trading plan.

HD

 

[ChrisM]

Quote from Hello_Dollars:

Riskreward,

Sounds like you're suggesting an out month iron butterfly or iron condor. If so, you're correct that your margin will be reduced as all the short options are covered. And yes, the position would typically be delta neutral when established and is vega negative. However, unless there's a noticable skew, such positions may not be the best way to capitalize on the expectation of an imminent volatility implosion since you will also be buying high priced options in establishing the position.

Personally, as someone who's traded these for a while, even with an expectation of declining volatility, I'd never use iron butterflies/condors with options having more than say 45 days of life given the gamma risk and the fact that theta doesn't really start generating profits for you until then. Just my 2 cents.

Regards,

HD

HD,

as you know, I use dual bflies for trading Qs. While the market dipped right before expiration, my profit this month was only 1,5%.
While I know you use similar technique but trading iron condors on XOE, may I ask how was your last month (nov) ? Obviously I do not ask for numbers but just for opinion. LOL

 

[Hello_Dollars]

Quote from ChrisM:



HD,

as you know, I use dual bflies for trading Qs. While the market dipped right before expiration, my profit this month was only 1,5%.
While I know you use similar technique but trading iron condors on XOE, may I ask how was your last month (nov) ? Obviously I do not ask for numbers but just for opinion. LOL

Chris,

My November XEO IC -- 490/500/540/550 -- did well, with all options expiring worthless yesterday, and the trade ending up at max profit ($4.65/spread). In fact, it was one of my "easier" months as the deltas of the short calls and short puts remained safely below 40/-40 throughout the entire life of the trade.

I'm curious. What were the specifics of the Nov butterflies you did, if you don't mind sharing? While I've not attempted it, it seems the QQQs may be a more difficult instrument on which to use such positions given their very high gamma. In fact, for that precise reason, I've been using straight directional positions on the QQQs (currently, long a bunch of Dec 34 puts) as part of a long gamma portfolio that I use to hedge my IC's.

Regards,

HD

 

[ChrisM]

Quote from Hello_Dollars:



Chris,

My November XEO IC -- 490/500/540/550 -- did well, with all options expiring worthless yesterday, and the trade ending up at max profit ($4.65/spread). In fact, it was one of my "easier" months as the deltas of the short calls and short puts remained safely below 40/-40 throughout the entire life of the trade.

I'm curious. What were the specifics of the Nov butterflies you did, if you don't mind sharing? While I've not attempted it, it seems the QQQs may be a more difficult instrument on which to use such positions given their very high gamma. In fact, for that precise reason, I've been using straight directional positions on the QQQs (currently, long a bunch of Dec 34 puts) as part of a long gamma portfolio that I use to hedge my IC's.

Regards,

HD

HD,

congratulations on your November performance. In Qs I had double bfly consisted of two 35/36 bflies:

1. 34/36/68
2. 33/35/37

I adjusted them twice through the life of option, so bfly #2 was free trade at last, but #1 was losing.
This shows that your strategy has larger profit range, as you said before, however adjustments opportunities might be better with dual bfly.
BTW I was just thinking of protecting my position by using straight directional as well i.e. buying additional 34 puts and 37 calls.
While your are right about very high gamma of Qs, I am thinking of DIA as another possibility. Gamma is much lower, but this market must have strong correlation with S&P100, so may be not the best for you to hedge.

Regards,

 

[Hello_Dollars]

Quote from ChrisM:



HD,

congratulations on your November performance. In Qs I had double bfly consisted of two 35/36 bflies:

1. 34/36/68
2. 33/35/37

I adjusted them twice through the life of option, so bfly #2 was free trade at last, but #1 was losing.
This shows that your strategy has larger profit range, as you said before, however adjustments opportunities might be better with dual bfly.
BTW I was just thinking of protecting my position by using straight directional as well i.e. buying additional 34 puts and 37 calls.
While your are right about very high gamma of Qs, I am thinking of DIA as another possibility. Gamma is much lower, but this market must have strong correlation with S&P100, so may be not the best for you to hedge.

Regards,

Chris,

Yes, I agree that the diamonds wouldn't really work as a gamma hedge for my purposes given the high correlation to the OEX. But in addition to hedging with the QQQs, I've started using a basket of select long/short stock/leap positions. Of course with those, you have non-systemic risk and are subject to the vagaries of stock selection. We shall see how it works out.

Regards,

HD

 

[ChrisM]

Quote from Hello_Dollars:



Chris,

Yes, I agree that the diamonds wouldn't really work as a gamma hedge for my purposes given the high correlation to the OEX. But in addition to hedging with the QQQs, I've started using a basket of select long/short stock/leap positions. Of course with those, you have non-systemic risk and are subject to the vagaries of stock selection. We shall see how it works out.

Regards,

HD

HD,

looks like XOE is better vehicle for range trading than Qs, but for me whole thing is how to defend your position. I know that you convert them, but do you find this strategy enough efficient ?
And what happens if the market turns around after converting and going back ?
The basket of horizontal spreads on stocks is nice idea but this takes some work, doesn`t ?

 

[Maverick74]

Quote from ChrisM:



HD,

looks like XOE is better vehicle for range trading than Qs, but for me whole thing is how to defend your position. I know that you convert them, but do you find this strategy enough efficient ?
And what happens if the market turns around after converting and going back ?
The basket of horizontal spreads on stocks is nice idea but this takes some work, doesn`t ?

Chris,

I'm working on a qqq trading strategy. I agree that the qqq's are not necessarily the best vehicle for flys or condors. I'm going to create a position that basically is going to involve short term trading around a qqq straddle. The basic core of the strategy will be look for support levels in the qqq and buy shares of the qqq's and sell the ATM straddle. This position will be aggressively traded and can be either long or short. The premium from the straddle will be used to offset any directional losses. The reason behind trying to buy support levels is because when the qqq's come in they will have a little more juice on the options and the rallies will take that juice back off. BTW, the sold straddle will obviously be a front month straddle. The position in the underlying will only be held for 2 to 3 days at a time. And a stop will always be placed on the underlying position.