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.

• 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.

Updated Trading Strategy

Here is my updated trading strategy:

• Trade high volume, high price stocks
• Look for the stock to be around the middle of its 52 week trading range
• High IV rank of 30% or better preferably 50% on up
• 90% probability of success and at least 1-2 standard deviations away
• Between 7 and 35 days left till expiration
• Leg into an iron condor with vertical spreads
• Collect at least .70 for each trade 
• Look to close each side at .15 one week later but no longer than 2 weeks later
• When the stock moves big one way look to close the winning side for a profit and re-deploy another iron condor
• Always stay at 90% probability OTM (out of the money) when you place your trade
• Never trade this strategy during earnings – use a different strategy 
• Use Person’s Pivots (PPS) to time entry
   

*Cash management

Leave $2000 available for options trading so you can fix any situations that go against you or jump on opportunities that may arise

I’ve Been Tasty Trading

I’ve been away for a little while trying to refine my strategy.  After finding the Tasty Trade network I wanted to digest a lot of what they were talking about to be able to speak intelligently about my own perspective on their approach.   

I believe that everyone has to find a trading strategy that works for them.  Each individual trader has their own risk tolerance and temperament and you can’t expect everyone to have the same results with one style.  There are however certain key aspects to trading that everyone uses to help them be successful and that’s what the Tasty Traders are using.  The concept of selling implied volatility is I think one of the foundational keys to their success.  One of their other concepts of taking profits at 50% of max profit is useful as well.

I was not as successful with one of their techniques like buying a poor man’s covered call as synthetic stock.  Time decay or theta is a very real force and should not be messed with.  

The best strategy for me at this point after trying several different approaches is to sell out of the money vertical spreads.  I have come up with a strategy that is an updated version of my previous one that I am having success with now.  Last winter I went 2 months without a losing trade with this strategy but I had some close calls.  I wanted to refine it so I could make it less stressful and more lucrative.  

I will post the strategy in the next day or so.