Calendar spreads

[Maverick74]

Quote from ChrisM:



Maverick,

thank you for interesting post, however in many points I have to agree with GA Trader, while I have tested some of these ideas myself.
First, volatile stocks with expensive options are much more likely to explode eating up your profits earned through few calendar spreads.
Second, the solution for this might be trading index options, but in this case vola will rarely give you impressive vega to short, however probability of staying in trading range is much higher so probability of winning is.
IMHO there is no "solid" attractive option strategy, but if you combine good strategy with possible adjustments, then you can get the edge.
My best in calendars so far is selling front month straddles against far month straddles and adjusting positions accordingly to market action.
Otherwise I would agree with GA Trader that by doing simple calendars you gain small profits which can be easily blown away with one major move.

Good luck and good trading.

With short calendars you want the stock to explode. I want the stock to be as volatile as possible so I can trade the front month gamma. I will do this leading up to the event that will cause the VOL to implode. Let me give you an example. This was a while ago. I think last December. MEDI had an FDA meeting and the stock was around 25 or so and trading all over the place. I was long the dec straddles at 25 and short the July's or maybe even Oct. Can't remember. Anyway the VOL ran up to 130 to 150 from about the 60 area. I was scalping the gamma like crazy. This stock was up and down every day on speculation that they would get their approval or not. The day of the meeting they got the approval, the stock moved up maybe a dollar or two and the VOL came in from 150 to 65 in one day in which I was short a shitload of Vega.

Your risk in this strategy is obviously being short Vega so VOL could keep going up which is why I would rather scale into rather then just put on the position. Also, I would choose plays that I could identify the reason for the VOL run up, such as FDA meetings or earnings reports. That way you have a target date. If the stock stops moving, you will lose on your theta since you won't be able to scalp the gamma however the Vol should come in if it stays quiet for too long. I mean obviously you have to do a lot of these and not put your whole account in one play. If you did 20 to 30 and even then still used a small percentage of your capital then I think your risk to reward would be outstanding.

 

[Hello_Dollars]

While vol has stayed low for a lot longer than many of us thought, this is still a dangerous market to be short vega. Thus, to offset my core vega neg OEX iron condor positions, I've been contemplating putting on a few OTM calendars on some select low IV percentile names (there are plenty to choose from here) as a "quasi-dispersion" trade.

 

[patefern]

Maverick74 wrote:

I think last December. MEDI had an FDA meeting and the stock was around 25 or so and trading all over the place. I was long the dec straddles at 25 and short the July's or maybe even Oct. Can't remember. Anyway the VOL ran up to 130 to 150 from about the 60 area. I was scalping the gamma like crazy. This stock was up and down every day on speculation that they would get their approval or not. The day of the meeting they got the approval, the stock moved up maybe a dollar or two and the VOL came in from 150 to 65 in one day in which I was short a shitload of Vega.

Same thing happened last month with VRTY day before earnings, IV went from 50's to 100's put side.

Hello Dollars wrote:

"quasi-dispersion" trade.

It's a matter of selection and being a trader when you boil it all down.

 

[GATrader]

Awesome discussions in this thread not like the pro firms section with all the mud slinging, etc.

My main point being that a short cal is better from a risk managment standpoint than long since if you are wrong in long cal, there is very little you can do to repair it but short cal you can gamma scalp, or take it off. if you put short cal on high vega 90th %tile above and the IV chart rolled over it is a high % trade.

Now if we can only get market maker margins w/.o joining an LLC who needs 200K. We'd all be buying the new 5 series in cash !!!!

 

[Maverick74]

Quote from GATrader:

Awesome discussions in this thread not like the pro firms section with all the mud slinging, etc.

My main point being that a short cal is better from a risk managment standpoint than long since if you are wrong in long cal, there is very little you can do to repair it but short cal you can gamma scalp, or take it off. if you put short cal on high vega 90th %tile above and the IV chart rolled over it is a high % trade.

Now if we can only get market maker margins w/.o joining an LLC who needs 200K. We'd all be buying the new 5 series in cash !!!!

I am currently inquiring about it at Echo. They trade options with market maker margins.

 

[GATrader]

Good luck. They are good people. They certainly have the back office to handle options since they clear thru Pax. Use Instaquote for options.

 

[Maverick74]

Quote from GATrader:

Good luck. They are good people. They certainly have the back office to handle options since they clear thru Pax. Use Instaquote for options.

And they use Micro-hedge as their software which everyone on the floor uses.

 

[Trajan]

Quote from Maverick74:



And they use Micro-hedge as their software which everyone on the floor uses.

Unfortunately, it isn't integrated into their feeds. You need to get another data provider, ATfinancial or Reuters, as well as input your trades manually. The guy I talked to last week said they have some other software, but doesn't do as much as Microhedge, costs less though(I forget what it is called).

As far as time spreads go, I agree that they make the most sense on a case by case basis. There simply isn't enough edge to justify me doing these on a regular basis in the normal group of stocks I trade. The position size needed would be too large and take up to much capital for the expected return. If I was auto-quting across all strikes and months that would be one thing, but I'm limited by how many order I can manage and exchange rules. They do pop up though as Mav describes it. If I go with a firm where I get MM haircut and find suitable software for managing my positions, I would probably look a lot harder for these.

 

[Maverick74]

Quote from Trajan:

Unfortunately, it isn't integrated into their feeds. You need to get another data provider, ATfinancial or Reuters, as well as input your trades manually. The guy I talked to last week said they have some other software, but doesn't do as much as Microhedge, costs less though(I forget what it is called).

As far as time spreads go, I agree that they make the most sense on a case by case basis. There simply isn't enough edge to justify me doing these on a regular basis in the normal group of stocks I trade. The position size needed would be too large and take up to much capital for the expected return. If I was auto-quting across all strikes and months that would be one thing, but I'm limited by how many order I can manage and exchange rules. They do pop up though as Mav describes it. If I go with a firm where I get MM haircut and find suitable software for managing my positions, I would probably look a lot harder for these.

Well, like I said through a previous post, I believe Echo gives guys haircuts on option trading. I will look into this further. Those short calendars I was referring to are really only effective with market maker margins due to the intensive capital requirement.

 

[Trajan]

Your haircut from Echo would be the exact same as a MM receives from PAX, 20% up or down. The guy seemed very accomodating on this point, which is a good thing. As long as you keep that number within your equity, you're golden. My only concern is with the platform. I would end up spending almost a $1,000 dollars a month on software, including Microhedge, and still not get the functionality I want. Maybe, it doesn't exist for what I'm willing to pay. Right now, I use their echo II product(INquote with another firm as a retail cs) which is acceptable, mainly because it is fast but doesn't offer anything to help me trade options and there doesn't seem to be anything to plug into it either.

The money thing seems kind of laughable considering I was paying nearly $10,000 a month to lease a seat just a couple of years ago.