Calendar Spreads. 1 of 10. April 27, 2015

Transcription

1 What is an op+ons calendar spread? A calendar spread involves selling one op+on and buying another op+on of the same type and strike, but with different expira+on cycles. A calendar entered with strikes that are at- the- money is considered a neutral strategy. Put and call calendars at the same strikes and expira+ons should have a similar risk profile. 1 of 10

2 Normally, calendars are entered as a debit as we are buying the longer dated op+on. This is done to collect posi+ve theta, because the front month op+on tends to have a higher theta value than the back month op+on. A Calendar spread is a defined risk strategy which in general is considered a low risk, low POP strategy. 2 of 10

3 In this example, the AAPL ATM theta of May expira+on is almost twice the value of that of the June expira+on. 3 of 10

4 When do we typically enter calendar spreads? Different from a ver+cal spread, a calendar is a type of long vola+lity strategy. Due the higher vega value in longer- date expira+on cycles, calendars benefit from increasing IV. For this reason, we want to enter calendars in low IV environments. 4 of 10

5 How do you calculate POP and max profit for calendar spreads? We cannot pinpoint the max profit and POP due to the different expira+on cycles embedded in the combina+on. However, there is a quick way to calculate the approximate P/L and ROC near the front month expira+on. We can es+mate these metrics as follows: 5 of 10

6 The current SPY May/Jun ATM 210 call calendar is trading at $1.54 debit. If everything stays the same un+l May expira+on, the May 210 call will expire worthless, and the calendar value will equal the June call value. Since June expira+on cycle is 35 days longer than May, we can es+mate the calendar value by looking at the May5 (38 DTE) 210 call value, which is $3.18. So, all else equal, the P/L es+ma+on is $1.64 = $ $1.54 Max ROC: $1.64/$1.54 = 105%

7 How do we manage calendar spreads? Similar to other strategies, we recommend taking off profits prior to expira+on. For calendars, we are generally out of the en+re trade prior to the expira+on of the front month. Maximizing profit from calendars can be difficult because it requires the stock price to be at your selected strike on expira+on. For a losing posi+on, you can roll front month posi+on to the next cycle to collect addi+onal premium and extend dura+on. 7 of 10

8 When would we enter a Diagonal instead of a Calendar? Diagonals have similar risk profiles as Calendars, but with different strike prices for the two expira+on cycles. Traders choose diagonals when they have a slight direc+onal assump+on in periods of low IV. Call diagonals that incorporate leaps are also known as a poor man s covered call. 8 of 10

9 Why we should avoid trading VIX calendars? Because VIX op+ons are priced off VIX futures, the VIX calendar is considered an undefined risk strategy. If VIX futures explode to the upside, causing backwarda+on, the VIX calendar posi+on could realize a big loss. This is due to the risk of the back month cycle not trading one for one with the front. 9 of 10

10 If we were long one 15 call calendar on Sep 15, 2014, here is the P/L ajer a VIX spike in October: VIX Calendar Value P/L 9/15/ $0.5 debit 0 10/14/ $0.75 credit - $ / $1.55 credit - $ of 10

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