The problem with calendar spreads

Quote from RichardRimes:

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.
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Hi,

Looking for a bit of advice as i know you trade a lot of calenders. Am i correct in saying, when i put in a long calender (short front month long back month) I dont want the the index to move away from my strikes ? This is because my back month will lose more than my front month, even though decay of the front month is in my favour (im losing more delta than im gaining in theta). So my question is, would you suggest i do a CALL above and PUT calender below the index. This is so if one calender is losing delta, the other one is gaining equivalent delta ? Hope my question is not too confusing : )

Thanks
 
Quote from scoobie27:

Hi,
So my question is, would you suggest i do a CALL above and PUT calender below the index. This is so if one calender is losing delta, the other one is gaining equivalent delta ? Hope my question is not too confusing : )

Thanks
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You want the index to move toward your short strike as it gets closer to expiration. Call or Put.
 
scoobie,

What you propose is a double calendar. I understand that you think the underlying will stay where it is now or in the neighberhood of it. So you place a calendar above and a calendar below current stock price. You are neutral in direction if strikes are equidistant from stock. And you can make adjustements later if things turn wrong. That is good practice,
and should be the way you trade the majority of your options portfolio, IMO.

Note that it goes not matter whether you use puts or calls (even for strikes above current price, but the puts will be in the money which can be a problem if bid-ask spread is high). But put calendars have a higher rate of returns (if dividend is less than interest). Check it for yourself if you do not believe this. If dividend is
higher than interest rates, then calendar done with calls are better than put calendars.

Do not believe everything that's written in this forum about options. Some people here seem to be confused in their understanding or may be they do not write down their mind clearly!
 
Quote from wenzi:

You want the index to move toward your short strike as it gets closer to expiration. Call or Put.
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You're right and i agree. But my concern is that the index moves away from my calender strikes, hence my double calender. If the index is moving away from one, its moving towards the other. Which i am hoping the the delta loss of one side will be neutralised by the delta gain of the other calender
 
Quote from riskfreetrading:

scoobie,

What you propose is a double calendar. I understand that you think the underlying will stay where it is now or in the neighberhood of it. So you place a calendar above and a calendar below current stock price. You are neutral in direction if strikes are equidistant from stock.
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Yes i prefer a CALL above and a PUT below the index, so they're both out the money. I prefer trading OTM stuff than ITM. And you're right, OTM stuff have better bid ask spreads. Question here is will i get delta neutrality ? My aim is to manage delta while benefitting from theta decay? ie not lose on delta. So am i on the right track here?


And you can make adjustements later if things turn wrong. That is good practice,
and should be the way you trade the majority of your options portfolio, IMO.[/QUOTE]

Do you mean trade the majority of my options portfolio by

1. Using double calenders? or

2. Making adjustments?

Can you give me an example of what can go wrong? I plan to experiment with the distant the strikes are OTM. Im thinking 50pts from ES index for both the PUTS and the CALLS.

I currently mainly trade ratio spreads and like them. Just want to add to my arsenal.


Note that it goes not matter whether you use puts or calls (even for strikes above current price, but the puts will be in the money which can be a problem if bid-ask spread is high). .[/QUOTE]
Yeah prefer not to trade ITM stuff due to wider spreads and sometime no quotes if its really ITM.

But put calendars have a higher rate of returns (if dividend is less than interest). Check it for yourself if you do not believe this. If dividend is
higher than interest rates, then calendar done with calls are better than put calendars.[/QUOTE]

Are you talking about the PUT skew where I can still get great premium FOTM. I don't understand this last part but will look into it.

Cheers
 
You might want to try this book

The Option Trader Handbook Strategies and Trade Adjustments by GEORGE M. JABBOUR & PHILIP H. BUDWICK

Not very "mathy", but has a lot of example situations
 
Quote from wenzi:

You might want to try this book

The Option Trader Handbook Strategies and Trade Adjustments by GEORGE M. JABBOUR & PHILIP H. BUDWICK

Not very "mathy", but has a lot of example situations
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Like all strategies' I'll have to get a feel for it with real money. That's how i learned my ratio spreads. Nothing like trading to get a feel for the strategies.

Ah.. OptionCoach's book. Thanks for the info and i might get it.
 
Quote from scoobie27:

Hi,

Looking for a bit of advice as i know you trade a lot of calenders. Am i correct in saying, when i put in a long calender (short front month long back month) I dont want the the index to move away from my strikes ? This is because my back month will lose more than my front month, even though decay of the front month is in my favour (im losing more delta than im gaining in theta). So my question is, would you suggest i do a CALL above and PUT calender below the index. This is so if one calender is losing delta, the other one is gaining equivalent delta ? Hope my question is not too confusing : )

Thanks
More...

Hi Scoobie, I did trade calendars and kept a log of them on ET for about 6 months. While I still do the occasional calendar I don't do them as much now because of the higher vix levels. Your assumption is correct...You do NOT want the underlying to move very far the first month in order for theta do its thing but you really need to understand how vega can affect your position. Also if you put one on just before earnings you can really have a disaster on your hands so make sure you know when earnings are being reported. If you WANT to play an earnings report then a double diagonal can be good (or horrible).

Calendars can certainly be a way to make small amounts of money (or lose small amounts of money). The only way to get a feel for them is to do them. Again, I'll look for calendar candidates when the vix is relatively lower. good luck!
 
"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?"

Ok here is how my pea brain works: S&P had formed a clear head and shoulder pattern so I buy Feb 48 puts on the Q"s because if it tanks as much as I thought it might it will pull down the Naz and the spread is closer than puts on the OEX or SPY. Unfortunately I am a few days too early and pretty soon I'm down 20% and decide that although I think I'm right on the evantual drop, Jan is usually an up month so I sell the Jan 47 puts to reduce my cost basis and I don't want to bother with a spread that returns less than the 20% I'm already down. As soon as I do that the big kahuna comes.
 
Scoobie: Here are some points that I tell people who learn from me:

1. I divide a portfolio into 2 parts: income part and specs part.
For each there are strategies.

2. You seem to be doing things somewhat backward if I can say that. It is ok when you start to play with a strategy, but what you should do is first find an intrument you like, then select the strategy. You seem to have a strategy and you want to fit it. Ultimately it is the selection of both that matters, but I tell students that they should do it the other way around.

3. delta neutral (or almost delta neutral) is a corner stone of income. But delta neutra can be positive or negative theta. You want positive theta (sell premuium). Now there are many that fits under this umbrella but you know to develop insight (you you seem to have done with your current strategy) for each to choose the right one.

4. Run numbers with call and put spreads using an option calculator. First find the fact, and then we can discuss why it is that way.

Sorry I am in a hurry now, but I might add a bit later.
I have to take some profits before 4;15Pm.

Bye
 
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