Calendar spreads

Calendar spread is...

  • Very good strategy

    Votes: 37 62.7%

  • Good for moving sideways markets only

    Votes: 31 52.5%

  • Too little profit strategy

    Votes: 15 25.4%

  • Losing strategy

    Votes: 8 13.6%
  • Total voters
    59
TOS

Thinkorswim does show the margin required for the short calenders under the analyze section so I assume they do allow them and they show the spread value in the order section. I can't see a spread value as such in IB so maybe they don't allow them or you have to leg in.
 
Quote from Maverick74:



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.
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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 ?
 
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 ?
More...

Chris,

A couple of things here. One, what did the stock do after they reported. Two, a one point loss is not that bad and the reward is not a qtr of a point. I have made over 4 to 6 pts in these trades and higher. I said most of the gains and losses would be small which is why I said you need to do a lot of them. Many of the gains will only be for 1/4 or 1/2 pt. And most of the losses will be for 1/4 to 1 point. But if you do enough of them the risk to reward ratio is very attractive. Also do you know how much the vol came in with mrvl? By the way, the prices you used were taken off the bids and offers which is fine but I always leg into these and get at least a nickel if not a dime off the bids and offers. So that already drops the loss to only .60 vs a dollar.
 
Quote from Maverick74:



Chris,

A couple of things here. One, what did the stock do after they reported. Two, a one point loss is not that bad and the reward is not a qtr of a point. I have made over 4 to 6 pts in these trades and higher. I said most of the gains and losses would be small which is why I said you need to do a lot of them. Many of the gains will only be for 1/4 or 1/2 pt. And most of the losses will be for 1/4 to 1 point. But if you do enough of them the risk to reward ratio is very attractive. Also do you know how much the vol came in with mrvl? By the way, the prices you used were taken off the bids and offers which is fine but I always leg into these and get at least a nickel if not a dime off the bids and offers. So that already drops the loss to only .60 vs a dollar.
More...

Mav,

I can see that your have mastered your technique through the time. So the devil is in details.
I don`t know exactly how come mrvl vol went up so much, so there might be some other event the public is waiting for.
Also - have you ever tried to trade this in longer time perspective ? The same mechanism should work for high vola stocks, even if vola does not implode in one day, but slowly going down. At least I think so.
About taking off bids and offers - what do you do if the market moves during trading ? These are ATMsm so deltas are high. And if you trade so many of them probability of such scenario is quite high, isn`t it ?
 
Thanks a lot to Mav and Hello Dollars for posting here. I called around to some brokerages and it looks like only Green Tree Trading allows spread margins for short back month/long front month. Are there any other ideas on how to play volatility implosion in the back months? Is putting a vertical spread on in the back month such a play? Should we do some sort of covered write?
 
Quote from riskreward:

Thanks a lot to Mav and Hello Dollars for posting here. I called around to some brokerages and it looks like only Green Tree Trading allows spread margins for short back month/long front month. Are there any other ideas on how to play volatility implosion in the back months? Is putting a vertical spread on in the back month such a play? Should we do some sort of covered write?
More...

You could do a synthetic naked call which would be short stock and short a put. I believe your margin would be the same as it would be for any short stock position and since your naked put is covered by the short stock you should be ok on that end. That would be a way to sell really high premium on the puts. However you would need to have a bearish bias on this play.
 
If you were to put on vertical spreads on puts and calls in the back month, expecting a volatility implosion, does that remove directionality?

And is this being short a straddle in the back month? Any opinions on this strategy? It does avoid the whole margin issue.
 
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