The problem with calendar spreads

There ARE problems or risks with calendar spreads. When you put on a diagonal the risk is magnified because you have added the risk of a vertical to the equation. The max loss of the calendar is simply the debit paid, much harder to figure out your loss in the diagonal, a great deal depends on how you decide to adjust.

Calendar spreads DON'T like big fluctuations in vega. Ideally you want quiet upfront month to at least get a leg up then a rise in vega is fine. Calendars don't work very well on stocks with high volatility. Calendars are also market neutral in that they work best when you really don't have a strong directional bent.
 
Quote from chrismontez:

Well I did it again and for sure it is the last time. Expected a drop in Feb so loaded up on QQQQ atm 48 sp puts at $180 . Decided to reduce my cost a little and sold the jan otm 47 puts against them for $30 shortly before expiration. Aghhhh. On a big drop like this the otm's went itm pretty quickly and I barely broke even when I had to close it out.
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also you broke even so really you did fine with your trade. Calendars/diagonals don't work all the time.

You were playing a direction and should have just done a Feb put vertical to play your directional bet.
 
Ok here is the deal, QQQQ's at $48+ and I go long Feb puts, Jan expiration coming up. In the 6 years I've been trading options, Jan has been a good month for going long. So I think I am safe shorting puts that are $1.50 otm. against my existing long Feb puts that have been decreasing in value because the market is going up.

Under " normal " conditions it would have been a safe trade. The QQQQ's don't usually have gaps of $3+. And if any of you knew this drop was coming in this strength, next time please let the rest of us know after you put on your trade.

My point was I have often been right in my initial position that using recommended option strategy trading practices involves buying options 2-3 months out. But then for one reason or another I leg in a short position on the near month as a form of hedging. Although it has worked sometimes, in general I miss big moves like this and I would be much further ahead not adjusting my original position.
 
Suppose the market did what you wanted to do (go up). Since you shorted an OTM put, this means your strike is below 48. I assume strikes are the same for feb and jan.

You would have lost! Why, because your overall delta is negative when you have a time spread with a strike below current price.

I am now understanding that you really need to understand options better.

Remember in a time spread you want the stock to move to the strike (not go away from the strike). Of course you have to deal with the vols as well.

Overall, if you placed your strike below 48 and stock moved towards your strike (which I understand it did), you should have made money since vol would have actually increased. I just checked VXN, and it did increase. So if you did not make money, probable you chose your strike the ATM strike. In such case you would have broke even not because of direction, but because vol saved you a bit because it typically increases when Qs head south.

There is something you do not say correctly here.
 
Under " normal " conditions it would have been a safe trade. The QQQQ's don't usually have gaps of $3+. And if any of you knew this drop was coming in this strength, next time please let the rest of us know after you put on your trade.[/B]
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AFAIK, this is all Monday morning quarterbacking, aka hindsight.

You buy long puts because you think the underlying is heading down. If right, you profit. If not, you don't.

You convert your long puts to a diagonal or a calendar because your outlook becomes less directional and you want to hedge the position. If the market stays in a certain range, you profit. If not, you lose.

If you hadn't adjusted into a calendar/diagonal and the market had zoomed up, resulting in a loss, would you be here now complaining about long puts?

Sh*t happens in the market. When it happens, consider it a winning trade to break even and be able to move on. Find another trade. It's a waste of time to obsess over opportunity losses.

There's nothing wrong with calendars as your title implies. It's the implementation and subsequent follow up that becomes the problem.
 
"You would have lost! Why, because your overall delta is negative when you have a time spread with a strike below current price.

I am now understanding that you really need to understand options better. "

You either don't understand what I wrote or don't have a clue. I bought Feb 48 puts expecting an evantual downturn in the market . A few days later as the Q's were going up in value I shorted some jan 47 puts as the mrkt was going against my initial trade. If the Naz had continued going up, stayed flat or dropped slightly over the next couple of weeks after I shorted , I would have pocketed the premium on the short jan calls that were $2 OTM and would have adjusted my Feb long put pos accordingly after Jan expiration, STILL expecting a decline in late Jan-Feb.

If you have any experience trading, you know that a drop of this magnitude over the entire market in a 7-8 day period in jan is VERY unusual.
 
"You convert your long puts to a diagonal or a calendar because your outlook becomes less directional and you want to hedge the position. If the market stays in a certain range, you profit. If not, you lose."

Bingo. Someone who understands a simple trade instead of going off on tangents. I never complain about a losing trade on naked options . When I buy options I use an amount of $ I can afford to lose. I only complain when I set up a winning trade with huge upside potential and shoot myself in the foot by thinking I can outsmart the market and pickup some extra premium on a close to expiration short that blows up in my face.
 
Quote from Tums:

vertical plus calendar = diagonal
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yeah.


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Please, I'm not a daytrader, I'm an "Intraday Liquidity Provider"

IF YOU HAVE TO ASK THAT, YOU SHOULD NOT BE TRADING OPTIONS!!
 
I am sorry but I was trying to help you. Your story has been incomplete and shifting. Now I understand that you were long a 48 put (which should be done if your think Qs heading down, but you also said that you were thinking Qs going up as you think it happens in Jan which is strange). Why would you buy a put when you thought Qs heading up?

Since you bought 48 put it means you were profitable. Why not just make a stop on your wins or close the trade.

You trade is a diagonal. It is a vertical PLUS a calendar.

Write what you did and when. For instance: when Qs was at price X, I bought/sold put/call at strike Y. Then Qs went to Strike Z, I then sold/bought put/call at strike A.

In each state what you expected the stock and volatility to do.

Then we will understand what you understand and do not understand.
 
Quote from riskfreetrading:



Then we will understand what you understand and do not understand.
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RFT, I think that everyone understands this one pretty well.

Chris - been there, done that, still do it. You put on the Diag. during extraordinary market conditions. I think that 90% of the time you would have improved your cost basis - especially if you trade the position. It's been pretty easy to screw things up lately.
 
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