To increase your probability of success for a longer duration you can increase the width of your profit window by deploying a double calendar spread. This is similar to an iron condor but with spikes on the end for greater profit, sort of like a double tent. A double calendar contains a calendar spread on the call and the put side. The profit potential in the middle of the profit window gets smaller as you increase the distance between the strikes on the call and put side.
Again only deploy calendars when there is low volatility and look to exit the trade earlier rather than later.
Friday, October 14, 2016
Probabilities of Calendar Spreads
When looking at calendar spreads you still have to take into account the probabilities. A regular calendar spread has a low probability of success and the curve is not wide enough to keep the trade on for any extended length of time. This is why you have to exit the trade early say within 3-4 days because you mitigate the inherent low probability by not holding on to the trade for long. Shorter time frames increase your probability of directional success.
Monday, October 10, 2016
Earnings Season
Earnings season is here again so this is the time to cue up the volatility plays. Premium will be richer during earnings season because of the potential for big moves.
For a complete calendar listing of earnings you can check here:
http://www.bloomberg.com/markets/earnings-calendar/us
For a complete calendar listing of earnings you can check here:
http://www.bloomberg.com/markets/earnings-calendar/us
Sunday, October 9, 2016
Calendar Spreads
I've been gone for a while trying to develop a strategy that fits my personality and temperament. I had studied so many differents strategies and I needed to simplify.
The one I came to that caught my attention was Calendar Spreads. I heard it was Tom Sosnoff's (from the Tasty Trade network) first trade.
Calendar spreads involve buying an option in a "back" month usually 40-70 days until expiration and selling an option in the "front" month usually 15 days until expiration. The point of a calendar spread is to take advantage of time (theta) decay which begins to exponentially take effect 15 days from expiration. Because the back month options are more expensive you will have a debit from your account and you are using the front month option to bring it's cost down.
The trade is usually put on during low volatility because you are essentially buying an option. You want volatility to increase so it will also increase the value of your option.
After doing some back testing I came up with a sweet spot that seems to work for max profit and max success.
You have defined risk because you can not lose more than the cost of your investment. I tried my back tests on DIA and SPY and most of the trades were successful. The thing to keep in mind is that the trade is directional, meaning, your best chance of success is to make the right assumption at the direction of the underlying but what helps you out even if you are wrong in your assumption is if the underlying moves sideways after it moves. You make up any losses on the time decay feature of the trade. Of course the optimal situation is if the underlying moves in your direction, then you can take profits.
The one I came to that caught my attention was Calendar Spreads. I heard it was Tom Sosnoff's (from the Tasty Trade network) first trade.
Calendar spreads involve buying an option in a "back" month usually 40-70 days until expiration and selling an option in the "front" month usually 15 days until expiration. The point of a calendar spread is to take advantage of time (theta) decay which begins to exponentially take effect 15 days from expiration. Because the back month options are more expensive you will have a debit from your account and you are using the front month option to bring it's cost down.
The trade is usually put on during low volatility because you are essentially buying an option. You want volatility to increase so it will also increase the value of your option.
After doing some back testing I came up with a sweet spot that seems to work for max profit and max success.
- Implied volatility (IV Rank) of 12 or less
- 40-70 days til expiration for the back month
- 15 days til expiration for the front month
- 25% Probability in the money on the front month
- Exit the trade at 10-12% profit
- Exit the trade between 3-4 days or if negative hold closer to expiration for theta decay
- Trade liquid underlyings of at least 500,000 daily volume trades
- Trade underlyings that don't have wide moves
You have defined risk because you can not lose more than the cost of your investment. I tried my back tests on DIA and SPY and most of the trades were successful. The thing to keep in mind is that the trade is directional, meaning, your best chance of success is to make the right assumption at the direction of the underlying but what helps you out even if you are wrong in your assumption is if the underlying moves sideways after it moves. You make up any losses on the time decay feature of the trade. Of course the optimal situation is if the underlying moves in your direction, then you can take profits.
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