Calendar Spreads

[RCMLLC]

I would agree if you are doing it with the goal of balancing out a portfolio. But the post I was alluded to was XLE, and strictly from a standpoint of that underlying, it does not stay in a range condusive for chasing it with adding calendar spreads seemingly when they are at the most premium.

To get a slight edge to this strategy, you will need to have some directional "bias" and the goal is that even if your directional forecast is wrong, it won't be too far off and over time you would be fine.

Quote from taowave:

I think your approach sounds a bit more directional in nature than a trader who may want to run a short theta/long vega book and hedge out any delta risk with the underlying..

If your primary objective is to run a short theta book and delta hedge,there is nothing wrong with adding additional calenders.

 

[yip1997]

Quote from Eliot Hosewater:

Terry's Tips has multiple calendars going at the same time. He adds new ones as the stock moves. I think his rule is that if the underlying gets 10% away from a spread he will roll it to something ATM. Sometimes it seems like he is chasing the market and losing money.

I'm becoming a bit disappointed with calendars. It seems the parameters are somewhat conflicting. That is you want high volatility in the near months to sell premium, but at the same time you don't want it to move much from the long term strike price.

BTW, I closed my XLE 55 put calendar a week or two ago, for about .60 profit overall.

Calendar is a hard strategy IMO. You want IV to increase but the spot doesn't move much. These two are conflicting and so it requires a special market condition to make profit.

I personally don't like to use calendar as my major strategy, but i like to use calendar for hedging partially.

 

[dqtmg2]

Quote from yip1997:

RR,

Calendar has a very special characteristics by itself. The profit zone is small, and the max profit occurs at strike. The calendar is a IV play and not a strong directional bet. It is best to put the strike at the money (or very close to it).

If you put a calendar far away from the money, what does it mean? What exactly do you want to achieve? I don't see the purpose of using a FOTM calendar.

However, suppose you opened a calendar when the spot was at x. When the spot moves away from x, and it is currently say at y, since the comfort zone for calendar is not very wide, your original calendar might be at a certain risk (delta, theta or vega), and you want to hedge against or balance the portfolio risk by adding another calendar with strikes at around y. I can see the adjustment benefit by adding a new calendar, but I don't see the benefit of adding many calendars in the first place.

The benefit I see is a wider profit zone, and less gamma risk near expiration. When I look at the reward/risk for a single XLE calendar in my trade, at expiration it is about 1.45. The profit zone is about 7 points wide. However to achieve that maximum profit is almost impossible, so the more realistic comparison is the max profit/risk with about 5 days left before expiration, which is about 0.7. Compare these to the multiple calendar, that has reward/risk ratio of 0.75 at expiration and a profit zone about 8 points wide. At 5 days prior the ratio is about 0.58, but because I have several strikes covered I can hold this position closer to expiration as I mentioned in an earlier post. So I think this trade is more conservative than a single calendar, but comparable in potential reward. It has much higher commissions, so you have to watch those to make sure the commissions are not eating too much of the profit.

After Friday's jump in XLE, which caused a 10% drop in value to the position, it is still up about 30% in 21 days. IV is up about 1/2 point from opening.

 

[RichardRimes]

Good discussion and good points from all of you. Thanks!

 

[dqtmg2]

Quote from yip1997:

Calendar is a hard strategy IMO. You want IV to increase but the spot doesn't move much. These two are conflicting and so it requires a special market condition to make profit.

I personally don't like to use calendar as my major strategy, but i like to use calendar for hedging partially.

My strategy is a bit different in that I am mostly focused on the first month with my multiple calendars. Note that my long was only 2 months beyond my short, which decreases the risk/cost of the position. I agree it is unrealistic to expect the spot not to move over multiple months, so I narrow it down to 1 or 2 months. IV does not have to increase, just not decrease too much. If it goes down a little, the underlying is likely range bound, which means you are still profitable.

 

[dqtmg2]

One other thing I forgot to mention is this strategy similar to a double diagonal and the risk graph is somewhat like a condor, but the multi cal has an opportunity for a couple of adjustments if needed. The DD and condor are difficult to adjust.

 

[yip1997]

Quote from dqtmg2:

My strategy is a bit different in that I am mostly focused on the first month with my multiple calendars. Note that my long was only 2 months beyond my short, which decreases the risk/cost of the position. I agree it is unrealistic to expect the spot not to move over multiple months, so I narrow it down to 1 or 2 months. IV does not have to increase, just not decrease too much. If it goes down a little, the underlying is likely range bound, which means you are still profitable.

You make profit because of the faster decay of the front month, and a much slower decay because it is 3 months away.

Your strategy is similar to my DD. Funny thing is "you found DD hard to adjust, whereas I found calendar hard to adjust". For calendar, my adjustment method is keep adding calendar. For DD, I convert my diagonal to calendar.

 

[dqtmg2]

Update on my XLE calendars- yesterdays jump in price went past a couple of stops I had set, and I closed the 52 and 53 calendars and opened the 58 and 59 Nov/Jan. This moved the profit zone to the right, but the max profit is now lower. Then today the Nov 54 bid got to .05, so I closed it. I waited on the Jan 54 put and closed it later today after XLE dropped some more. The profit had dropped to about 1/3 of what it was a week or two ago, but it was still profitable. Around lunchtime today IV went up and the profit was back up to where it was a week or so ago. I rechecked IV and it is up about 0.5% from opening after being flat a couple of days ago. I am tempted to close everything out here, but XLE is almost centered between my 55,56,57,58 and 59 strikes, so I will wait to see what next week brings. If it stays centered I will probably roll the Novs to Dec. If it moves toward the one of the end strikes I will probably close it out. After 4+ weeks of watching the paint dry, these last 8 days should be exciting.

The current Greeks are Delta 15, Gamma -399, Theta 89, and Vega 280. At what gamma level should I be looking to roll/close this trade? My spreadsheet shows about 1.55 of total time value left in the shorts.

Tim

 

[yip1997]

Quote from dqtmg2:

Update on my XLE calendars- yesterdays jump in price went past a couple of stops I had set, and I closed the 52 and 53 calendars and opened the 58 and 59 Nov/Jan. This moved the profit zone to the right, but the max profit is now lower. Then today the Nov 54 bid got to .05, so I closed it. I waited on the Jan 54 put and closed it later today after XLE dropped some more. The profit had dropped to about 1/3 of what it was a week or two ago, but it was still profitable. Around lunchtime today IV went up and the profit was back up to where it was a week or so ago. I rechecked IV and it is up about 0.5% from opening after being flat a couple of days ago. I am tempted to close everything out here, but XLE is almost centered between my 55,56,57,58 and 59 strikes, so I will wait to see what next week brings. If it stays centered I will probably roll the Novs to Dec. If it moves toward the one of the end strikes I will probably close it out. After 4+ weeks of watching the paint dry, these last 8 days should be exciting.

The current Greeks are Delta 15, Gamma -399, Theta 89, and Vega 280. At what gamma level should I be looking to roll/close this trade? My spreadsheet shows about 1.55 of total time value left in the shorts.

Tim

Tim,

By looking at your greeks, your multiple calendars are very different from standard calendars. Your negative gamma is too high. A big swing will hurt you even with an increase in IV.

I am saying it for discussion only, and I never traded XLE. It might work out well with XLE because I am not familiar with the characteristics of XLE.

 

[rallymode]

I see this thread is still going so let me throw in a comment. I havent seen much discussion on delta calendars and i think you guys are missing out. If you have average directional skills you are really wasting your time and efforts trading these ATM time spreads on sub 20 vol tickers. You wait 3 weeks and collect your theta and when you are ready to book gains, the spot gaps on you and forces you to roll and then the waiting game starts all over. That just about sums up 90% of your experiences, doesnt it?

Take the calendar and place it OTM into the direction of your signal. I personally prefer puts on rangebound high vol stocks. You play for deltas and vegas while having positive theta. Also, you can shift the balance of the bet according to your forecast by varying the duration. Longer for vega, shorter for delta.

A few caveats to keep in mind:

1. You want to make sure the vols are near the low if not at the low of the recent range while the tenor skew is flat or negative(lower vols in the back months).
2. You want to make sure the vol-smile in the back month is as flat as possible so that you dont overpay in skew. You dont want to gain a few hundred bps in vols and have them wiped out by the skew.
3. It's a vega bet so when trading equities consider the earnings releases and the implications of volatility cycles.

These are also excellent hedges if you tend to carry a lot of short gamma on your sheets. Just something to think about.