Calendar spreads

[Hello_Dollars]

Chris,

When setting the short strikes for my iron condors, I use a combination of standard deviation analysis plus, like you, an assessment of support-ressistance levels. I'm always sure to set my short strikes outside of the applicable S/R range. Hence, if the underlying violates either of those levels, than my thesis for the trade (that the market will remain within the identified range) has been violated and I will take action.

In terms of specific adjustments, I don't have any iron clad rules, but will act based on a variety of factors, including how much time is left until expiry, prevailing volatility levels and the price of the options, the strength of the underlying move, and, secondarily, since I try not to let my own biases get in the way as they're typically not worth very much, my own market outlook. Based on those factors, I will either close out the spread "at risk", buy back the short option and let the long option run, or convert the spread into a butterfly or a long condor.

One last point. As I think I mentioned in an earlier post, if I'm able to execute my entries well enough so that I generate a net credit that assures me a greater than 1:1 P/L ratio, then I can sit on the trade longer and avoid making premature adjustments. That's important with any theta positive strategy. At the same time, since gamma is the strategy's evil twin, one needs to be careful not to stay with a trade too long. But I guess it's knowing when to hold or fold 'em that makes this more of an art than a science, and I'm still learning how to mix my colors.

Regards,

HD

 

[ChrisM]

Quote from Hello_Dollars:

Chris,


In terms of specific adjustments, I don't have any iron clad rules, but will act based on a variety of factors, including how much time is left until expiry, prevailing volatility levels and the price of the options, the strength of the underlying move, and, secondarily, since I try not to let my own biases get in the way as they're typically not worth very much, my own market outlook. Based on those factors, I will either close out the spread "at risk", buy back the short option and let the long option run, or convert the spread into a butterfly or a long condor.

One last point. As I think I mentioned in an earlier post, if I'm able to execute my entries well enough so that I generate a net credit that assures me a greater than 1:1 P/L ratio, then I can sit on the trade longer and avoid making premature adjustments. That's important with any theta positive strategy. At the same time, since gamma is the strategy's evil twin, one needs to be careful not to stay with a trade too long. But I guess it's knowing when to hold or fold 'em that makes this more of an art than a science, and I'm still learning how to mix my colors.

Regards,

HD

HD,

looks like we do almost the same, using similar weapons.
I was thinking about std deviation analysis some time ago but now I use more my own TS codes to determine probability of staying in certain trading range. Simply I composed my own indicator which e.g. counts how many times during certain period of time, underlying breaks out by certain percentage off the channel, but also can do other calculations. I can test this with different inputs getting some idea for the best strategy timing.
Doing this I can also find that, regardless of basic volatility concepts, some instruments are much more useful for neutral strategies than others, and at most times there is no really logic explanation for this. At this point it seems to be more like psychological work trying to get personal profile of the underlying LOL.
I rarely can open net credit butterfly positions, so I usually deal with small debit positions, as long as potential reward/risk ratio is favorable e.g. 3 to 1 or so.
I asked about adjustments because earlier this year I was testing my concept of selling OTM options hedged with stock using highly volatile ones. Unfortunately if the underlying moved against my positions I had to buy them back paying sometimes three times more, so it did not work. The solution might be staying with OEX, XEO or ETFs but then potential profits would be not that impressive due to higher margin because of using stocks.
I am wondering what advantages you find in using iron condors vs. simple butterflies ? Looks like both should be profitable in similar percentage change price channel, but btfly can bring better profit if market stays flat (as long as my observation is correct). Is this about possibility of adjustment ?

Regards,

 

[EliteThink]

Hi Chris, we also use a dynamic indicator. What is it you use to measure volatility?

 

[ChrisM]

Quote from EliteThink:

Hi Chris, we also use a dynamic indicator. What is it you use to measure volatility?

Hi ET,

actually for vola I use standard services. Additionally I use functions calculating price/price underlying vs. internal price/trading range. Seems to work better than measuring volatility alone.

 

[Hello_Dollars]

Chris,

The main reason I prefer iron condors to long butterflies is simply that I get a much wider profit range with the former. Hence, with my IC's, the underlying can move quite a distance in either direction before the trade is at risk and thus I have a lot more margin for error. With a comparable long butterfly, the profit range would be much smaller. Of course, the trade-off is that the IC is "more expensive" to put on given the margin requirements, and thus carries more risk. On the other hand, my probability of profit will be higher with an IC and I think I've learned how to manage the risk of the positions pretty effectively.

Lastly, there are myriad potential adjustments to both iron condors and long butterflies, so that's not realy a factor for me. Though I will say that, having traded IC's as my primary position for a couple years now, I've developed a level of comfort with how to manage them that's reinforced their attractiveness to me as an opening position.

Regards,

HD

 

[ChrisM]

HD,

I can see your point view now, and agree that it works. Also I believe that ICs are actually better for adjustments than btflys.
The only problem with adjustment is that if you have to make too many you may lose anyway, e.g. if you have to adjust your position close to expiration then it is hard to get anything on OTM option.
Also depends on underlying and timing. I would never try to trade diagonal spreads on highly volatile stocks e.g. I traded verticals on IGEN but then one day it was down almost 10 pts at open and after some time (due to Roche decision) opened almost 20 pts up. So, I can trade ratio spreads on Qs because probability of dramatical gaping at open is quite low.
I am wondering now whether you use similar timing approach.
I usually look for new trades to open after old series expiration but also open some at beginning of each month. While theoretical time decay is fastest in last four weeks before expiration, many times later openings give me same entry as on the day right after.
This rule obviously does not apply to calendar spreads, as we mentioned before.

Regards,

 

[Maverick74]

I decided to bring this thread back to life. I'm surprised that I don't see more guys on here doing short calendars. Even though I don't do these now I use to do these a lot a few years back. I looked for really crazy stocks that had news coming soon such as earnings, FDA meetings, or any other big event. I would sell the long term options, maybe even the leaps and buy the front month on the same strike. I would be short vega which I wanted because the VOL would spike going into these events, long gamma which I wanted so I could scalp the gamma because the stock would be all over the place and then after the news, I would exit the position after the VOL collapsed. The key was focusing on crazy stocks that moved a lot, and finding the short term event that was causing the VOL to be so high.

I'm curious if anyone has done these lately and what kind of market environment it has been for short calendars. I imagine there must be a lot of opportunity with volatility being so low and still dropping.

 

[GATrader]

Interesting insights about calendars Maverick. Been doing some long calendars and main issue with them is that profits on most of them get blown out by one calendar. That is what happened to me with EK last month. Another issue with long cal is it is hard to find good ones since the intermonth is flat or even reverse. I would like to experiemnt on the short side since you can easily control the bleeding on short cal. i.e. if you put it on and nothing happens after x days you can get out. You can even amortize your loss. Rare is the strategy where your loss is laid out per day ! Risk with long cal on the other hand is sometimes impossible to control due to overnight risk. Put it on and stock drops your spread goes from $1.5 to 5 cent offered! End of story !

Good luck

 

[Maverick74]

Quote from GATrader:

Interesting insights about calendars Maverick. Been doing some long calendars and main issue with them is that profits on most of them get blown out by one calendar. That is what happened to me with EK last month. Another issue with long cal is it is hard to find good ones since the intermonth is flat or even reverse. I would like to experiemnt on the short side since you can easily control the bleeding on short cal. i.e. if you put it on and nothing happens after x days you can get out. You can even amortize your loss. Rare is the strategy where your loss is laid out per day ! Risk with long cal on the other hand is sometimes impossible to control due to overnight risk. Put it on and stock drops your spread goes from $1.5 to 5 cent offered! End of story !

Good luck

Yeah plus I just think it's always more natural for VOL to come in then go up. Like I said, if you find the right stock that has a catalyst and a huge VOL runnup going into that catalyst, I believe the numbers are very much in your favor. And yes, it's very easy to control the bleeding of the front month by scalping the stock. And if the stock is volatile enough, even make money on the gamma. The VOL implosion that usually happens on the day of the even tends to be dramatic, is some cases coming in 50 to 100 basis pts.

The only time I would ever be short Gamma is if I was short straddles and short stock in a rising and strong market. Also the gamma would have to be very expensive.

 

[ChrisM]

Quote from Maverick74:

I decided to bring this thread back to life. I'm surprised that I don't see more guys on here doing short calendars. Even though I don't do these now I use to do these a lot a few years back. I looked for really crazy stocks that had news coming soon such as earnings, FDA meetings, or any other big event. I would sell the long term options, maybe even the leaps and buy the front month on the same strike. I would be short vega which I wanted because the VOL would spike going into these events, long gamma which I wanted so I could scalp the gamma because the stock would be all over the place and then after the news, I would exit the position after the VOL collapsed. The key was focusing on crazy stocks that moved a lot, and finding the short term event that was causing the VOL to be so high.

I'm curious if anyone has done these lately and what kind of market environment it has been for short calendars. I imagine there must be a lot of opportunity with volatility being so low and still dropping.

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.