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Calendar Spreads on SPY, RIMM, USO or anything with Weekly Options

Reminder: Pharmboy is available to chat with Members, comments are found below each post.

I am by no means a perfect option trader in this PITA of a market, but I have noticed that the volatility is very high!  Using options to mitigate the risk is what playing is about, and I have implemented a Calendar strategy that seems to be working quite nicely over the past few months with the volatility so high.  First, though, there are a few terms needed to understand the strategy:

    Delta – Delta is a measure of the change in an option’s price (premium of an option) resulting from a change in the underlying     security (i.e. stock) or commodity (i.e. futures contract). The value of delta ranges from -100 to 0 for puts and 0 to 100 for     calls (here delta has been multiplied by 100 to shift the decimal).

     Theta - Theta is not used much by traders, but it is an important conceptual dimension. Theta measures the rate of decline of     time-premium resulting from the passage of time. In other words, an option premium that is not intrinsic value will decline at an     increasing rate as expiration nears.

Also, one needs to use technical analysis in their use of the calendars, as the trend is your friend, and fighting it can be bad.  I encourage all to read the TA handbook at the top of the PSW site.

SPY and USO have been trading in a very large, but predictable range since August.  Using these charts, I have been playing the volatility by implementing a calendar in each direction (modified condor) to take advantage of the theta decay.  My bias is towards to the down side, but I usually buy/sell OTM calls and puts.

On Friday before the close, I have initiated a Calendar Spread/Condor on SPY and/or USO, where I am picking options with a delta of ~0.3X and selling the corresponding weekly ones with a delta that is usually 0.05 or so below that of the long dated option.  This strategy gives us two directions to play, and if the market moves quickly in one direction or another, we can benefit from the theta decay of the short call and/or put.

With the long dated option, we have the benefit of time on our side.  If the short call or put goes ITM, the decay will rapidly erode on any reversals in the market.  For instance, last Friday (Sept 23rd), I said,

OK for SPY calendars……Call side is:  Oct 116 (buy)/Sept 116 Q (sell); Put side is: Oct 110 (buy)/Sept 110 Q (sell).  4.00 debit/contract.  5 contracts to start.  If it is new, 1 contract to start.   Here we go……

Today, we bought back the call side of the calendar for 2.08.  While that may not seem like much, the put side was down, but the market was falling like a knife, and these were actualy not 1/2 of the price on Friday of the $4, but rather $1.83.  In essence, we made $25/contract, so 5 contracts – $125.  That is >10% in one week on cash used, which is not to bad.  (Needless to say, we should have held on until the EOD Monday an made it up to $2.30 on the call side – oh well).

The put side was the other $2.17, and by EOD Monday, Sept 26, the puts were $1.92, so a $25/contract loss.  The beauty is, we rolled the 110s to 112 for $28/contract, and the delta is very similar to the delta of our long put.  We can now wait until the next move and if needed, we can roll the put side up again, or just let the market fall into our lap, allowing theta to do its work. 

Meanwhile, on the call side, by the EOD Monday, we did a SPY Oct/Sept Q $117 Calendar call spread to sell into the excitement for $2.14.  At the close, we are up on those $16/contract ($2.30 is the current price).

Here is our current risk profile:

The first dotted red line is our losses if we go below SPY $111.88, the other is above $117.84!  Max is at SPY $117.  As longs as we remain range bound, this should continue to be our friend. Just stay nimble, and let the market do the work for you.  There is no need to over trade.


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  1. Hi, Pharmboy:  Super!
     
    Just 2 questions:
    Q1: When you said "Today, we bought back the call side of the calendar for 2.08", you meant you closed both the long and short calls at the same time.  Right?
    Q2: How active do you usually trade on this strategy?  I have a day job, and can’t still there and watch all the time.  Is this the kind of trade I can do if I only log in several times a day?


  2.  Pharm – thanks, and a good explanation.  I have been following and just started using some calendars, mostly on the put side to hedge, but I like your strategy for trading the range as well.  If the market goes to far in either direction, you can also just put another calendar on further out, either up or down and run a triple calendar as well.  They are very flexible.


  3. Q1: yes.

    Q2: I check them daily, but they are to be adjustable so that you do not have to play them for a few days.  Weekends are for Monday/Tuesday.  Mid week is for close on Friday.  So, you should not have to check in every day.


  4. Pharmboy
    when market run away from your strike do you roll both options or only shorts closer to the market?


  5. both options I mean longs and shorts, how I understand other side options you close with some profit at this time (when market approaching your strike)


  6. Pharmboy
    how you plan to fight Gamma? you know, when just couple of days left till exp. and your shorts get ITM Delta of your shorts growing up so fast and became higher than Delta of your long, with big move (gap) you can loose quite a lot,
    or you try to avoid this situation and close it right ATM with some small profit?


  7. tcha – I will wait until the close of that week (this Friday) and look for a roll that makes sense.  Today will be a perfect example of that.  For the Puts, I will roll the short puts up and most likely the long puts up with the money that I roll the short puts up with.  So today, The 110s will be rolled somewhere with a delta of .3, and the short puts will be rolled to the same.


  8. The only thing you can lose is your premium, really, since the strikes are at the same price.


  9. Pharm
    can you please repost where I can find  K1 Project?
    TIA


  10. spiro – here.