Low Risk/High Reward (60%+ per Year) Calendar Spread

J

jones247

I must admit that I feel a little selfish, but I'm compelled to share my strategy for the following three reasons: (1) I've benefited from some of the information that others have shared on this forum, therefore, in return I should "give back"; (2) The Lord Himself stated that "it is better to give than receive", in that by giving/sharing we are blessed on several levels (spiritually & financially). (3) There may be others with insights on how to improve the strategy. O.K. enough with the altruistic talk... on to the simple yet powerful and low risk calendar spread...

It's entering into long term calendar strangle spreads with stocks having low IV. For example, I would buy a Jan 09 call ATM & sell a Dec 08 call ATM. Also, I would buy a Jan09 put ATM & sell a Dec 08 put ATM. Next month I would enter into another set of long term calendar strangle spreads for Feb/Jan. I would continue to do this each month. I would liquidate the initial (Jan/Dec) spread about the October/November time period. At that point I would begin liquidating and rolling/compounding each month. Based upon the favorable Theta (a definite certainty) & Vega (a probable situation if selected wisely) outcomes, I would yield about 20% - 40% ROI every month after the initial 3 - 4 month incubation period.

As you see, it's reasonable to earn 60% - 100% Return on Investment per year, especially with compounding and dynamic positioning, with very little risk. The biggest challenge is the bid/ask spread on all the transactions. There are a few things I'm testing, such as legging-in and averaging-in to close the gap; however, this may cause additional and unnecessary risk.

Any thoughts or constuctive criticisms...

Thanks,

Walt
 
You might add some call verticals above the calendars to enhance the profit, using the calendars to protect them.

Sort of a covered call strategy.
 
Quote from jones247:

At that point I would begin liquidating and rolling/compounding each month. Based upon the favorable Theta (a definite certainty) & Vega (a probable situation if selected wisely) outcomes, I would yield about 20% - 40% ROI every month after the initial 3 - 4 month incubation period.

As you see, it's reasonable to earn 60% - 100% Return on Investment per year, especially with compounding and dynamic positioning, with very little risk.
More...

What would be the maximum potential returns per year, based on 40% per month, with compounding?
 
man i love these "make 100% with low risk" threads.

what do you think is gonna happen if iv increases or the stock moves away from your strikes?

i hope you didn't open some of these low-risk positions 2 weeks ago.
 
Any time you can buy far back month volatility at historic lows (historically low IV), that's a high-probability play. If you can sell volatility with less time remaining (in a month that is closer to expiration) at a decent IV in order to offset back-month theta risk, so much the better. I would add that:

- To me, the most important part of this approach is to find options in the back month that are near or at their historically low IV. If you can do that, you drastically reduce your vega risk, and it frees you to do things like ratio calendars, where you buy more back month options than you sell front-month options.

- Things change, and you can't expect that you will be able to continue doing this on the same stock ad infinitum. Actually, what you WANT is for IV to rise so it is no longer at historic lows. You will make money - but the spread will no longer be so attractive for the next series.

- Don't feel locked into buying and selling the same strikes, or doing the spread in a 1 to 1 ratio. Tailor the spread to fit the situation. Spend time with your position analyzer, trying different combinations until you find one that has the risk/reward profile you want. Don't hesitate to go long or short the underlying to adjust your deltas.
 
I'm sorry cdowis,

But I don't think adding vertical calls ITM would benefit this strategy. Although it may bring in more profits, it also provides more risk.

Walt


Quote from cdowis:

You might add some call verticals above the calendars to enhance the profit, using the calendars to protect them.

Sort of a covered call strategy.
More...
 
Hi OddTrader,

Please be reminded that the returns I mentioned were Returns on Investment, not Returns on Assets. Also, the 20% - 40% per month is after the incubation period of about 3 - 4 months, and it would be against the margin invested.

Walt

Quote from OddTrader:

What would be the maximum potential returns per year, based on 40% per month, with compounding?
More...
 
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