Calendar spreads

[ChrisM]

Quote from Hello_Dollars:



Chris,

I was reasonably profitable last year, but I don't think the comparison is valid since I had not fully settled on the iron condor approach until this year, having done a lot more directional credits. Indeed, I didn't even start trading the XEO until this year, having previously traded mostly stock options as well as the SPX and DJX. So this year, which has been significantly more profitable, is the better comparison.

At the same time, I'm fully cognizant of the fact that this has been a favorable year for vega negative strategies, and that partly explains my results (though I also attribute some of that to having developed a trading approach to this strategy and the market I'm focusing on built on experience and a helluva lot of contracts, which I think will get me through any market environment).

But for the reason you cited, my primary focus these days is on the development of a gamma positive trading strategy to hedge the gamma risk of my core IC positions, knowing that market conditions are likely to change in the future. Specifically, as I may have mentioned previously, I'm currently engaged in the construction of a long/short portfolio using leaps.

While I'm comfortable with my stock selection approach based on fundamental, technical and volatility factors, I'm still working through the details of some issues, such as the optimum strikes to use, the setting of profit, stop and time stops, and the specifics of the trading strategy (i.e. when and whether to write short term options against the long leaps). I also need to figure out how to calculate and apply an overall portfolio hedge ratio.

As this is still a work in progress, I'd of course welcome any suggestions anyone might have.

Happy Thanksgiving all!

HD

HD,

looks like we are working on similar issues.

I have tried some concepts for hedging neutral strategies with different results.
One of them was short ETF/long ATM Call but not delta neutral, using different ratios, mostly about 1:2. To lower margin requirements I used SSFs, which are OK for ETFs.
I have developed my own worksheet for this model, calculating trading range and percentage of breakouts.
I think you can get similar results with long/short portfolio, just ranges might differ.
I was also thinking about using ETFs OTM options, while they have smaller size, but in a case of breakouts OTMs will pick the values relatively faster.

Did you ever consider Dual ICs ? I use Dual Flies with good results and sometimes I stack them on the top of each other. In a case of ICs it might provide much larger profit range, which would be easier to hedge.

Thanks for Thanksgiving wishes,

All the best,

 

[Eldredge]

Quote from Hello_Dollars:



Chris,

I was reasonably profitable last year, but I don't think the comparison is valid since I had not fully settled on the iron condor approach until this year, having done a lot more directional credits. Indeed, I didn't even start trading the XEO until this year, having previously traded mostly stock options as well as the SPX and DJX. So this year, which has been significantly more profitable, is the better comparison.

At the same time, I'm fully cognizant of the fact that this has been a favorable year for vega negative strategies, and that partly explains my results (though I also attribute some of that to having developed a trading approach to this strategy and the market I'm focusing on built on experience and a helluva lot of contracts, which I think will get me through any market environment).

But for the reason you cited, my primary focus these days is on the development of a gamma positive trading strategy to hedge the gamma risk of my core IC positions, knowing that market conditions are likely to change in the future. Specifically, as I may have mentioned previously, I'm currently engaged in the construction of a long/short portfolio using leaps.

While I'm comfortable with my stock selection approach based on fundamental, technical and volatility factors, I'm still working through the details of some issues, such as the optimum strikes to use, the setting of profit, stop and time stops, and the specifics of the trading strategy (i.e. when and whether to write short term options against the long leaps). I also need to figure out how to calculate and apply an overall portfolio hedge ratio.

As this is still a work in progress, I'd of course welcome any suggestions anyone might have.

Happy Thanksgiving all!

HD

Hello Dollars,

Would you mind elaborating on how you use a large number of contracts to increase your profitability? Do you enter several ICs at once with different strikes, or enter new positions as time passes, or do you leave legs open as you roll up and down, or something else? Thanks for any help.

 

[Maverick74]

Quote from stocktrader:

Mav,
first of all thanks to you and all the other regular contributors to this board. If would be wonderfull if all boards were are as good as this one but I guess that would be too much to hope for.

I have a few questions regarding your short term calendar spreads that you make on stocks 1 day prior to earnings realease or what ever event.

1. Do you still make these type of trades?

2. If you do not still make these trades is it becase
(a) Market conditions have changed and they are no longer as profitable as they used to be.
(b) Have you found other strategies that suit you better and are more profitable?

3. You mentioned in an earlier post that you would leg into these type of trades, and so try and avoid paying the spread. Do you therefore take the long position first in order to avoid the risk of having naked positions. If this is the case what happens if you get filled on your longs but can't get filled on your shorts. Would you therefore pay up for the shorts and have to swallow the spread?

In repsonse to your questions.

1) I currently do not trade those but I will again very shortly. I'm opening a new account.

2) (a) There are always good calendar plays out there regardless of mkt conditions.
(b) Calendars are not the most profitable trade out there but they are very safe conservative plays that can hedge risks from different strategies very well.

3) By legging in, I normally try to pick off just a .05 or .10. I have a very good technique for doing this. If for any reason I miss the other leg then I just eat the loss and put the other leg on. I never fight with the devil. Always leg into long premium first for obvious reasons.

 

[Maverick74]

Quote from Eldredge:




Hello Dollars,

Would you mind elaborating on how you use a large number of contracts to increase your profitability? Do you enter several ICs at once with different strikes, or enter new positions as time passes, or do you leave legs open as you roll up and down, or something else? Thanks for any help.

Eldredge,

You can add a second condor to your first condor turning it into an albatross. And add yet another turning it into a terdactyl (sp). What you accomplish by doing this is you spread out your profit range but reduce your profit. So if the mkt is pushing against one of your wings you are essentially pushing the wall a little further out and hoping the mkt settles back somewhere in the middle. It's actually a very good strategy. Some guys do this with flies. Turning a butterfly into a condor. You just keep rolling your flies up as the mkt moves from strike to strike.

 

[Hello_Dollars]

Quote from Eldredge:




Hello Dollars,

Would you mind elaborating on how you use a large number of contracts to increase your profitability? Do you enter several ICs at once with different strikes, or enter new positions as time passes, or do you leave legs open as you roll up and down, or something else? Thanks for any help.

Eldredge,

Maverick answered the question far better than I could. One thing I'd add though. I actually put a good deal of effort each month into establishing my initial position by legging into my iron condors (they're actually iron albatrosses) a vertical spread at a time, selling call spreads into strength and put spreads into weakness. The purpose is to allow me to extend my profit range to approximate the standard deviation range of the underlying and be beyond assessed support/resistance levels without sacrificing much, if anything, in the way of net credits.

The risk, obviously, is that I will be overweighted deltas for some period of time each month until the entire position is established. That can last a period of days. Most are not comfortable with this approach given the directional risk, but it's one that's served me reasonably well. And if I do it properly and the market accommodates, I wont have to make any adjustments at all during the life of the position. Of course, life is rarely so simple, and I will thus not hesitate to adjust if need be along the lines described by Maverick.

HD

 

[Hello_Dollars]

Quote from ChrisM:



HD,

looks like we are working on similar issues.

I have tried some concepts for hedging neutral strategies with different results.
One of them was short ETF/long ATM Call but not delta neutral, using different ratios, mostly about 1:2. To lower margin requirements I used SSFs, which are OK for ETFs.
I have developed my own worksheet for this model, calculating trading range and percentage of breakouts.
I think you can get similar results with long/short portfolio, just ranges might differ.
I was also thinking about using ETFs OTM options, while they have smaller size, but in a case of breakouts OTMs will pick the values relatively faster.

Did you ever consider Dual ICs ? I use Dual Flies with good results and sometimes I stack them on the top of each other. In a case of ICs it might provide much larger profit range, which would be easier to hedge.

Thanks for Thanksgiving wishes,

All the best,

Chris,

Interesting. We should compare notes.

With regard to your question, I'm not sure what you mean by "dual IC's". Could you give me an example?

HD

 

[ChrisM]

Quote from Hello_Dollars:



Chris,

Interesting. We should compare notes.

With regard to your question, I'm not sure what you mean by "dual IC's". Could you give me an example?

HD

HD,

Actually I might have used improper name, while Maverick explained this technique in details.
The difference is, that with Dual IC e.g.:

490/500/520/530 and
500/510/530/540

you get additional possibility to make adjustments during market`s corrections.
Two ATM wings of ICs will gain and lose value due to gamma changes, so you may buy your shorts back nad sell them again.
Your risk of this trade is just a little higher than for regular IC (plus price of short option which is bought back), but by doing this you buy low and sell high.
At many times reverse market`s reaction after such correction can give you chance to reduce risk and sometimes to get free risk trade.

 

[riskarb]

HD -- long vega trades have been brutalized over the last few months, as any quick perusal of a VIX chart will point out.

Take a look at at chart of spot/implied vols and you'll see the oscillator trending well > 1.00 -- long calendar spreads have been the worst strategy to trade in this market -- long vega and short gamma. Spot vol increases, albeit slight, have killed short gamma trading coupled with a drop in implied vols.

I traded 100k contracts in long time spreads last year, but have traded them VERY sparingly this year.

arb.

 

[stocktrader]

Mav,
thank you for answering my questions.

"3) By legging in, I normally try to pick off just a .05 or .10. I have a very good technique for doing this"

Can you expand on this technique or is that something you would rather not explain on a public message board?

 

[Maverick74]

Quote from stocktrader:

Mav,
thank you for answering my questions.

"3) By legging in, I normally try to pick off just a .05 or .10. I have a very good technique for doing this"

Can you expand on this technique or is that something you would rather not explain on a public message board?

There are many many safe ways to do this. One is to leg into a trade synthetically for a .05 or .10 cheaper then the actual. The other way I use is to time the delta movements with the mm's autoquote features. It's pretty easy actually.