Calendar spreads

[Maverick74]

Quote from GATrader:

Maverick,
you could probably lease one of these packages like neoticker, investor rt which has alarms. You can program criteria and have it set when the indicator gets tripped. From your macrocode, it sounds like you can gamma scalp using boll bands since the bands expand when the avg true range expands which is usually what happens during overnight gaps. For instance, I can program Inv RT to alarm when Last < LowBollBand. There are other products there you might want to research such as the plug ins offered with IB or Sterling's predator used mainly by Echotraders. I am sure there are plenty more. Search on ninja trader, bracketrader,etc

Hey,
I just thought of something. About the bollinger bands for gamma scalping, what happens when the band is curving up or down. For example if you program your software to buy when it touches the lower band and sell when it touches the higher band, what happens when the stock is in an uptrend and the stock keeps touching the lower band, you will actually be buying deltas when you should be selling deltas right. Same thing for downtrends. Maybe there is a way around this. Such as telling it to ignore buy signals when you are long deltas. Also can you program it to read your deltas so it knows how many shares to buy and sell? Just curious, thanks.

 

[GATrader]

You can have a col in an excel spreadsheet that takes your position and figures out the delta and have it calcualte to the nearest 100 the hedge. Re: the BB touching the lower in an uptrend, I would think the program should consider the delta position as primary criteria for buying or selling. Ex. you are flat then got long because of a gap up, the scalp is to sell correct? But what if xyz doesn't touch the upper band, backs off a little and touched the lowerr band, it still should sell not buy. therefore the program should really look at the delta not the BB. However, you can program it so that sell comes if delta > .80 AND BB > .50 so this way while you might not get the perfect BB setup (i.e. selling at bb hi) you can still get a sale off at a better area than if you just blindly sell if delta=x.

 

[ChrisM]

Quote from Maverick74:



Any word yet from this programmer?

Maverick,

sorry for the delay. I had no chance to see him this week, but I will meet him on Tuesday.
As for now, I know that he needs more details about how you scalp gamma, to define the algorithm. I will PM you his detailed questions after our meeting, after explaining to him what I know about that.

 

[rrisch]

"what happens when the stock is in an uptrend and the stock keeps touching the lower band"

Is that mathematically possible? I don't recall ever seeing a Bollinger Band like that. As a stock rises, it seems to always go higher than the lower band. Stocks in an uptrend hugging the upper band, or in a downtrend, hugging the lower band, are very common.

 

[GATrader]

uptrending stock hitting lower band caught me off guard too. i don't see it often enough. But I guess it could happen if the stock is in a mild trend OR keep in mind that the bands are keyed off of Ma so if the MA is big enough, you can have a minor retracement and hit the lower band . It could happen also if the volatility is tight (i.e. no overnight gaps, low avg true range) the bands would be tight so it is indeed posible.

 

[ChrisM]

Quote from Maverick74:



Yeah, I understand what you are doing but the risk is still there. It might not seem significant when its $100 but what if I put on the Butterfly for 25k, then I sell the calls and increase my risk to 50k. Well, 50k is a lot of money and if the stock just drops as much as a couple of points between now and expiration, I lose it all. That is a lot of money. And since I am assuming you are putting these butterflies on the front month, time is not on your side if you get an adverse move, we are talking weeks, maybe days here. I think the better play here is just to hold the butterfly till expiration.

In your example, it would be similar to me saying I could buy a call for 50$ and if the stock dropped, buy another call for $50 because the stock will usually come back up. Well, I am risking 100% of my capital here. Sure it's only $100, but 100% is still 100%.

Like I said before, on the floor guys could put on long butterflies for credit and a conservative floor trader could make a very good living doing this. He had no risk! However, trying to do these off the floor, you are basically trying to manipulate the position to make it do what you want it to do. I have found over the years with my experience trading options that this is not a very healthy practice.

Murphy"s Law always seems to show up at the wrong times. Whenever you need the stock to rally it will sell off, whenever you need it to selloff, it will rally.

However, if these are working for you, go at it. Maybe you really have a very good feel for them. Options is all about accepting some sort of risk. If you are willing to accept directional risk, then thats fine. Some guys would rather accept volatility risk or time risk. It's all up to the individual trader.

The risk you are talking here is similar to risk accepted in calendars i.e. risk of huge move resulting in loss equal to difference btw. front and far month option. I know it happens rarely, so my max risk is related to the same situation.
What is important for me that market move sideways in 2/3 of the time, so for most of the time I should be able to open free or almost-free trades after adjustments.
Obviously we don`t trade those based only on pure assumptions. My man projects specific EL codes for getting interesting for us statistics and then we proceed the tests.

 

[Maverick74]

Quote from ChrisM:



The risk you are talking here is similar to risk accepted in calendars i.e. risk of huge move resulting in loss equal to difference btw. front and far month option. I know it happens rarely, so my max risk is related to the same situation.
What is important for me that market move sideways in 2/3 of the time, so for most of the time I should be able to open free or almost-free trades after adjustments.
Obviously we don`t trade those based only on pure assumptions. My man projects specific EL codes for getting interesting for us statistics and then we proceed the tests.

Chris,
When you are short calendars you have long gamma. That means that large moves actually benefit you. So if I have a short calendar on IBM and they come out with numbers and the stock opens down 4 pts, I will make some nice change. Plus I should see a nice drop on Vol after the report which will work nicely with my short vega. I think you are confusing long calendars with short calendars. A long calendar wants the stock to sit still. You have negative gamma and long vega. Anytime you are long front spread you are going to have positive gamma and short front spread the opposite. I like putting on positions with long gamma. I can still capture premium by being short vega. I would only have negative gamma on index options and even then I would probably use condors or ratio spreads.

I think the butterfly can work well if you can predict price action very well. Also, what I would do with butterflies is stack them on top of each other and turn them into condors. So if you have a strong stock you can keep rolling up the strikes and add new butterflies. I would do this rather then trying to take off the 2 short calls and try to buy them back. By rolling up the butterflies you actually expand your profit range.

I am very interested in hearing how those tests come out. This should be interesting.

 

[Don Bright]

Calendar spreads are fine as long as you are collecting the $$ (thetas) on the near term time decay, while holding onto the delta neutral positon via adjusting the far out position.

"Back in the Day" on the trading floor, I have to say that I enjoyed being long the March's, short the Decembers (of the same strike of course), and then roll them over as values warranted. This was (yes, Was) a good bread and butter position to keep on your sheets....but you still had to trade in and out of those positions on almost a daily (definitely weekly) basis to make the real money.

Love selling those calls on Thursday take a long weekend.

Can't find much benefit in the calendar spreads with low interest rates and such low, low, volatility.

All the best... (as always, I did not vote)

Don

 

[ChrisM]

Quote from Maverick74:



Chris,
When you are short calendars you have long gamma. That means that large moves actually benefit you. So if I have a short calendar on IBM and they come out with numbers and the stock opens down 4 pts, I will make some nice change. Plus I should see a nice drop on Vol after the report which will work nicely with my short vega. I think you are confusing long calendars with short calendars. A long calendar wants the stock to sit still. You have negative gamma and long vega. Anytime you are long front spread you are going to have positive gamma and short front spread the opposite. I like putting on positions with long gamma. I can still capture premium by being short vega. I would only have negative gamma on index options and even then I would probably use condors or ratio spreads.

I think the butterfly can work well if you can predict price action very well. Also, what I would do with butterflies is stack them on top of each other and turn them into condors. So if you have a strong stock you can keep rolling up the strikes and add new butterflies. I would do this rather then trying to take off the 2 short calls and try to buy them back. By rolling up the butterflies you actually expand your profit range.

I am very interested in hearing how those tests come out. This should be interesting.

Maverick,

it is funny but you are right - I have really confused short calendars with long calendars. The description I had from "Futures" magazine was about "spreads" and related to index products, which as you said, are better candidates for longs then shorts. And now everything looks just right, because what you are saying is exactly what I have found.
However - about my index btflys I can not agree with you and my belief is that your view of this issue is somehow affected by hunting for directional trades.
I know that $100 by 100 times gives $10K. It is not relevant to the case. The crucial point is reward/risk and probability.
It goes simply like this: If I start from reward/risk 3:1 ratio and then I go into 2:1 ratio in worst case scenario (which actually means 20% breakdown having low probability based on historical price action) then no matter what market will do, the profits must come up as long as market does not change its behavior completely. Our studies show that it almost never happens in case of broad indices. That`s why we trade them.
However, I have to say that I greatly appreciate your insights about calendar spreads, while they match so closely my observations, regardless of my short experience in this field.

 

[Maverick74]

Quote from ChrisM:



Maverick,

it is funny but you are right - I have really confused short calendars with long calendars. The description I had from "Futures" magazine was about "spreads" and related to index products, which as you said, are better candidates for longs then shorts. And now everything looks just right, because what you are saying is exactly what I have found.
However - about my index btflys I can not agree with you and my belief is that your view of this issue is somehow affected by hunting for directional trades.
I know that $100 by 100 times gives $10K. It is not relevant to the case. The crucial point is reward/risk and probability.
It goes simply like this: If I start from reward/risk 3:1 ratio and then I go into 2:1 ratio in worst case scenario (which actually means 20% breakdown having low probability based on historical price action) then no matter what market will do, the profits must come up as long as market does not change its behavior completely. Our studies show that it almost never happens in case of broad indices. That`s why we trade them.
However, I have to say that I greatly appreciate your insights about calendar spreads, while they match so closely my observations, regardless of my short experience in this field.

Chris, just curious, who is we?

Also, don't get me wrong, I am not saying butterflies are at all risky, in fact quite the opposite, they are very safe trades, however when you take part of it off, you are changing the structure of the position. Never the less, I think they are still great to trade, but if you really like them a lot, I would recommend going down to the floor, where you can actually put them on for a credit and enjoy a nice risk free trade.