Webinar Audio. Long Calendar Spreads: Setup, Risks, and Uses 6/21/2011

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Opal Harrell
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1 Webinar Audio Join Integrated VOIP when prompted. No audio through telephone No dial-in conference numbers provided Please make sure: Volume is unmuted and TURNED UP Speakers are ON, OR Headset is activated & recognized on your computer All other browsers and programs are closed Internet Explorer works best for viewing webinars Slow internet speed can interfere with your audio reception. Technical assistance for live webinars: , choice 1 for assistance, then choice 2 for attendees Long Calendar Spreads: Setup, Risks, and Uses June 21,

2 Disclaimer Options involve risks and are not suitable for all investors. Prior to buying or selling options, an investor must receive a copy of Characteristics and Risks of Standardized Options, sent to you in previous communication. Additional copies may be obtained by calling TRADEKING at KING visiting or by downloading the file in the pop-up window on your screen. Multiple leg options strategies involve additional risks and multiple commissions, and may result in complex tax treatments. Please consult a tax advisor. Any strategies discussed and examples using actual securities and price data are strictly for illustrative and educational purposes only and are not to be construed as an endorsement, recommendation, or solicitation to buy or sell securities. Past performance is not a guarantee of future results. Consider the following when making an investment decision: your financial situation, your risk profile and transaction costs. System response and access times may vary due to market conditions, system performance, and other factors. The projections or other information generated by TradeKing's tools regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. The Greeks represent the consensus of the marketplace as to how the option will react to changes in certain variables associated with the pricing of an option contract. There is no guarantee that these forecasts will be correct. 3 Disclaimer While implied volatility represents the consensus of the marketplace as to the future level of stock price volatility, there is no guarantee that this forecast will be correct. Market timing is a complex investment strategy which involves risk and may incur additional commission costs. Webinars are provided for educational and informational purposes only. All investments involve risk, losses may exceed the principal invested, and the past performance of a security, industry, sector, market, or financial product does not guarantee future results or returns. TradeKing provides self-directed investors with discount brokerage services, and does not make recommendations or offer investment, financial, legal or tax advice. You alone are responsible for evaluating the merits and risks associated with the use of TradeKing's systems, services or products. TradeKing selects and defines as All-Stars certain independent market commentators who are recognized industry personalities and experienced traders. TradeKing All-Stars provide timely market commentary via the TradeKing All-Star Webinars. Each All-Star commentator's bio, related qualifications and disclosure as to their relationship with TradeKing can be found on the All-Star roster, available at The selection of All-Stars commentators is solely based on the quality and style of the content provided. TradeKing does not measure, endorse, or monitor the performance or correctness of any statement or recommendation made by independent All-Stars commentators. Supporting documentation for any claims made by Brian Overby will be supplied upon request by the author of the webinar, who is solely responsible for the views expressed here. Send a private message to All-Stars using the link below the profile image. 4 2

3 Long Calendar Spread A Long Calendar Spread is the simultaneous sale of a near (front) term option and the purchase of a far (back) term option of the same strike price and the same type (puts or calls). Max Risk is the net debit paid for the trade. Long Call Calendar Spread: Sell Jul 50 Calls, Buy Aug 50 Calls Long Put Calendar Spread: Sell Jul 50 Puts, Buy Aug 50 Puts 5 Long Calendar Spread Stock = 100 Buy 1 60-Day (Aug) Commission Sell 1 30-Day (July) $6.25 Net Debit of (max risk) 4 Option Premium Exp. of Jul. Exp. of Aug. 6 3

4 Long Calendar Spread Stock = 100 Buy 1 60-Day (Aug) Sell 1 30-Day (July) Sell 2.50 Buy 0.00 Net Debit of Option Premium Net P&L = Max Risk = Commission To Close Aug Call $ Exp. of Jul. Exp. of Aug. 7 Distribution of Time Premium 30-Day Options with Stock at Assumes flat implied volatility and 0% interest rates 8 4

5 Distribution of Time Premium 30-Day Options with Stock at Assumes flat implied volatility and 0% interest rates 9 Question for Playbook What stocks (not indexes) are good candidates for one-month calendar spreads (ex: sell July, buy Aug)? 10 5

Long Calendar Spreads: Setup, Risks, and Uses Long Calendar Spreads Entry Criteria Long Calendars Criteria 1) The expirations chosen depends a lot on the underlying.

6 Long Calendar Spreads: Setup, Risks, and Uses Long Calendar Spreads Entry Criteria Long Calendars Criteria 1) The expirations chosen depends a lot on the underlying. If you are going to do a one month (sell July, buy August) time spread, you need stocks with some volatility and some predictability. If trading indexes or stocks with low I.V., you need a few rolls to make it worth your while, example sell July and buy October. Stocks for One Month Calendars general guidelines. Pi Price Vol % 50 30% 20 40% Indexes on average trade at lower implied volatilities and because of this, it is better to embed a few rolls rolls. 12 6

7 Long Calendars Criteria 2) Open Interest equal to 40 times the number of contracts you are trading. (for each leg) 3) Avoid chasing volatility skew/tilt. It is there for a reason. The time decay difference between the front month and the back month is more then enough to make the trade profitable. Many times a time spread is good to do after a major news event happens. 4) Check the tilt to make sure the I.V. is not skewed too much against you. A few I.V. points is normal. 5) Goal on ATM long one month calendar spreads is to risk a $1 to make a $1. Look at P&L graph to see if this risk reward ratio exists. You are long Vega, a uniform drop in I.V. hurts. 13 Long Calendars Criteria 6) Know when earnings will be announced! Try to avoid them or close the trade before the date (not as much an issue with indexes). 7) Think about doing them out-of-the-money (OTM) instead of right at-the-money y( (ATM). OTM calendars will cost less. If bearish use puts, if bullish use calls. Puts are usually cheaper because of carry costs. Lower upfront cost means lower overall risk. 8) Set a profit value and a loss value for the trade and be diligent about exiting when your target prices are realized. 9) Like to look for situations where the front month (short) expires before earnings and back month (long) expires after earnings. 14 7

8 Long Calendar Spreads: Setup, Risks, and Uses Long Calendar Spreads Exit Criteria Long Calendar Exit Criteria 1) Set profit and loss limits Hard to hit a homerun Don t be greedy 2) Close as spread when pertinent t If you choose to close just the short position. You will be net long an option. No longer a spread trader. 3) If it hits the strike in the last week before expiration either roll to next month or close the trade. 4) If it becomes way OTM think about buying the short back for $0.05 and then you have a long lottery ticket. 5) If way ITM early assignment can be an issue. Puts are often assigned early. Calls might be around a dividend. You will owe the dividend if not careful. 16 8

9 Phone Numbers: (877) 495-KING s: Brian s Blog: The Options Guy TradeKing s Trader Network: Check out OptionsPlaybook.com Today! Social Networks: Twitter.com/TradeKing Youtube.com/tradeking Facebook 9

Skip Strike Butterflies: Setup, Risks, and Uses. Disclaimer 2/21/2012

Skip Strike Butterflies: Setup, Risks, and Uses Disclaimer Options involve risks and are not suitable for all investors. Prior to buying or selling options, an investor must receive a copy of Characteristics