The Ultimate Options Course Double Calendar Spreads

Transcription

1 The Ultimate Options Course Double Calendar Spreads Kerry W. Given, Ph.D. (Dr. Duke) Parkwood Capital, LLC 2011 Parkwood Capital, LLC. All Rights Reserved.

2 Disclosures and Disclaimers Buying and selling stocks and opaons involves risks and may not be suitable for all investors. Prior to buying or selling an opaon, the investor must receive a copy of the booklet, CharacterisAcs and Risks of Standardized OpAons, from your broker or from The OpAons Clearing CorporaAon, 1 North Wacker Drive, Suite 500, Chicago, IL The informaaon in this presentaaon is presented for educaaonal purposes only. It should not be construed as a recommendaaon or solicitaaon to buy or sell opaons. Many examples of opaons trades are presented in this presentaaon as illustraaons of the principles being taught in this course. These examples are not recommendaaons or solicitaaons to buy or sell any stock or opaon. To simplify the calculaaons, commission costs have not been included in the examples in this presentaaon. Commission costs will affect the outcome of any stock or opaons trade and must be considered prior to entering the transacaon. No representaaon is being made that any account will or is likely to achieve profits or losses similar to those discussed in this presentaaon. The past performance of any trading system or methodology is not necessarily indicaave of future results Parkwood Capital, LLC. All Rights Reserved. 2

3 Introduction A double calendar spread: An OTM call calendar above the stock or index price a bullish posiaon An OTM put calendar below the stock or index price a bearish posiaon Double calendars are conservaave income trades 2011 Parkwood Capital, LLC. All Rights Reserved. 3

4 Finding ATM Calendar Candidates The following bullet points are duplicated from the Calendar Spreads presenta8on; comments in red highlight the differences between ATM calendars and double calendars. Sell about 25 to 30 days of Ame premium - Same Ensure current IV is in the boyom quarale of recent IV history - EmphaAcally the same! Don t trade a negaave IV skew - Same; the R/R curve will droop too much with negaave IV skew Beware if the posiave IV skew is 4 points - Since you have a larger BE range, you may safely accommodate a larger move, but cauaon is sall advised with large posiave skews Avoid this stock if recent price ranges exceed ± 1 σ - Same, but similar caveat as above No pending earnings announcements or other significant events - Same Sell > $0.40 of Ame premium - Similar Calculate the break- evens (BE) using opaons analysis sogware - Same Low IV stocks (ca %) are conservaave but require a large number of contracts - Not good candidates for double calendars; OTM premiums are too small Stocks with higher IV ( 20%) have higher returns but more price movement risk - Good candidates One key distinction: if the stock price is between strike prices, the double calendar spread will be more delta neutral than a calendar spread above or below the stock price 2011 Parkwood Capital, LLC. All Rights Reserved. 4

5 Case Study Expect 18% to 34% gain over $490- $540 6/19/07 GOOG July/Aug 490/530 Double Calendar; $9,500 debit; BE = pt skew with calls; +1.7 pt with puts; 2011 Parkwood Capital, LLC. All Rights Reserved. 5

6 Case Study 7/13/07: closed the GOOG double calendar on the Friday before expiraaon for a 12% loss The stock price increased 7%; BE range increased 23% 2011 Parkwood Capital, LLC. All Rights Reserved. 6

7 Where is the Risk? Delta Risk Price moves too far Wide break- even range Vega Risk Decreasing IV decreases the break- even range and profitability Increasing IV skewed too far toward the front month Vega for the long opaons >> vega for the short opaons (40-48% greater in previous example) Risk/Reward Usually ca. 1:1 Large losses are unusual Previous example: price moved $38 or 7%, yet only a 12% loss 2011 Parkwood Capital, LLC. All Rights Reserved. 7

8 The Search For Candidates Implied volaality Current IV must be low historically Look for IV skew: a) Beware of a negaave IV skew b) Beware of a large posiave IV skew Spreading the calendars apart Widens break- even range good R/R curves begin to droop in middle bad Less premium as go OTM bad Time to expiraaon Too few days leg (< 25) bad Too many days leg (> 35) bad 2011 Parkwood Capital, LLC. All Rights Reserved. 8

9 The Search For Candidates: IBM Large posiave IV skew But too liyle premium sold Only 14 days leg R/R droop results 8/3/07 IBM Aug/Oct 100/120 Double Calendar; $3,070 debit (10 cts) IV = 21.8% and in 89 th percenale 2011 Parkwood Capital, LLC. All Rights Reserved. 9

10 The Search For Candidates: IBM Large negaave IV skew R/R droop results Trade to the green line 8/3/07 IBM Sept/Oct 100/120 Double Calendar; $1,670 debit (10 cts) IV = 21.8% and in 89 th percenale 2011 Parkwood Capital, LLC. All Rights Reserved. 10

11 The Search For Candidates: IBM Pulling strikes together narrows BE But improves R/R droop 8/3/07 IBM Sept/Oct 105/115 Double Calendar; $2,250 debit (10 cts) IV = 21.8% and in 89 th percenale 2011 Parkwood Capital, LLC. All Rights Reserved. 11

12 The Search For Candidates: GE BeYer R/R curve IV skew of +3 pts But IV is very high 8/3/07 GE Aug/Dec 37.50/40 Double Calendar; $2,750 debit IV = 24.3% and in 100 th percenale 2011 Parkwood Capital, LLC. All Rights Reserved. 12

13 The Search For Candidates: GE Nice R/R curve Sold more Ame IV skew of +2 pts But IV is very high 8/3/07 GE Sept/Dec 37.50/40 Double Calendar; $1,810 debit (10 cts) IV = 24.3% and in 100 th percenale 2011 Parkwood Capital, LLC. All Rights Reserved. 13

14 Search For Candidates (9/5/08) Stock/Index Implied VolaDlity PercenDle* AAPL nd GE th GOOG rd QCOM th DJX th NDX st RUT th SPX st * This is the percenale of current IV in the last 600 trading days, e.g., for GE, the current IV is higher than 90% of IVs recorded over the last 600 trading days Parkwood Capital, LLC. All Rights Reserved. 14

15 The Search For Candidates (10/14/09) Stock/Index Implied VolaDlity PercenDle* AAPL th GE th GOOG rd QCOM st DJX nd NDX th RUT th SPX nd * This is the percenale of current IV in the last 600 trading days, e.g., for GE, the current IV is higher than 90% of IVs recorded over the last 600 trading days Parkwood Capital, LLC. All Rights Reserved. 15

16 The Search For Candidates: AAPL Broad R/R curve IV skew of +2 pts 10/14/09 AAPL Nov/Jan 180/200 Double Calendar; $8,310 debit (10 cts) IV = 36% and in 16 th percenale 2011 Parkwood Capital, LLC. All Rights Reserved. 16

17 Search for The Optimal Strikes NDX Nov/Dec 1725/1775 Neutral IV skew IV = 19% and in 13 th percenale $3,620 debit (1 contract) Broad BE range: 1680 to 1825 EsAmated return of $1,200 or 33% 2011 Parkwood Capital, LLC. All Rights Reserved. 17

18 Search for The Optimal Strikes NDX Nov/Dec 1700/1800 Neutral IV skew IV = 19% and in 13 th percenale $3,435 debit Broad BE range: 1664 to 1837 EsAmated return of $900 or 26% 2011 Parkwood Capital, LLC. All Rights Reserved. 18

19 Search for The Optimal Strikes NDX Nov/Dec 1675/1825 Neutral IV skew IV = 19% and in 13 th percenale $3,165 debit Broadened BE range: 1638 to 1858 EsAmated return of $600 or 19% 2011 Parkwood Capital, LLC. All Rights Reserved. 19

20 Search for The Optimal Strikes NDX Nov/Dec 1650/1850 Neutral IV skew IV = 19% and in 13 th percenale $2,850 debit Very broad BE range: 1606 to 1884 EsAmated return is low! 2011 Parkwood Capital, LLC. All Rights Reserved. 20

21 Search for The Optimal Strikes Strikes BEs Debit Return 1725/ $3,620 33% 1700/ $3,425 26% $3,165 19% $2,850 Negligible As we broaden the strikes for the double calendar: The debit decreases The BEs broaden The profitability decreases The R/R curve sags in the middle 2011 Parkwood Capital, LLC. All Rights Reserved. 21

22 The Search For Candidates (4/25/11) Stock/Index Implied VolaDlity PercenDle* AAPL st GE rd GOOG th QCOM th DJX th NDX th RUT st SPX th * This is the percenale of current IV in the last 600 trading days, e.g., for GE, the current IV is higher than 90% of IVs recorded over the last 600 trading days Parkwood Capital, LLC. All Rights Reserved. 22

23 Adjustments Use the break- even prices as your triggers for adjustment: Be more aggressive in the first half of the trade, i.e., adjust early If less than 10 days are leg, either close the trade or roll to next month We adjust by closing some or all spreads opposite to the price move, and opening new calendar spreads farther up or down Use posiaon delta and the R/R curves to determine the best adjustment Use your posiaon delta to determine the numbers of spreads to close and open Try to return the posiaon back closer to delta neutral 2011 Parkwood Capital, LLC. All Rights Reserved. 23

24 Multiple Calendar Spread Position 5/21/08: RUT mulaple Jun/Jul calendar posiaon: call calendars; call calendars for $3820; call calendars; put calendars; total debit = $10, Parkwood Capital, LLC. All Rights Reserved. 24

25 Multiple Calendar Spread Position On 5/29/08, I added 4 Jun/Jul RUT 750 call calendars for $3,520; total debit now = $14, Parkwood Capital, LLC. All Rights Reserved. 25

26 Multiple Calendar Spread Position The upper BE was threatened on June 5, but the RUT pulled back; theta was $309 per day 2011 Parkwood Capital, LLC. All Rights Reserved. 26

27 Multiple Calendar Spread Position A few days later, the lower BE was threatened, but it pulled back again. I closed the trade on 6/16 and 6/18 for a gain of $4180, or 29% Parkwood Capital, LLC. All Rights Reserved. 27

28 Conclusions Double calendars are conservaave income trades and share the same vega risk profile as an ATM calendar spread. Double calendars are useful where we expect a bit more volaality in the underlying stock or index and therefore want a broader BE range; normally, the underlying IV would be 20%. But we sall want IV to be in the lower quarale of historical IV for that stock. Consider a double calendar when the stock price is in between strike prices. A more advanced trade is to establish mulaple calendar spreads, e.g., one ATM spread, a call spread above (OTM), and a put spread below (OTM), or perhaps even more spreads as in the previous example. Manage these trades exactly as you would a double calendar spread Parkwood Capital, LLC. All Rights Reserved. 28

29 Homework 1. Name the two principal risk factors for double calendar spreads. 2. What is the advantage of a double calendar over an ATM calendar? 3. When would I use an OTM call calendar instead of a double calendar? 4. I have chosen the strikes for my double calendar and the posiaon delta is - $50. What does this tell you about my predicaon for this stock? 5. Use the opaons analysis sogware from your broker s web site to analyze these posiaons: 1. AAPL Sept/Oct 220 put and 260 call double calendar. 2. AAPL Oct/Jan 220 put and 260 call double calendar. 6. For the trades above: 1. What would it cost to put on one contract and where are the breakevens? 2. Is there an IV skew? If so, how much and is it posiave or negaave? 3. Would you recommend either trade? Why or why not? 7. We established a Nov/Dec 110/130 double calendar on IBM with 30 days leg in Nov and IBM was trading at $120. IBM trades up to $130 over the next 10 days. What should I do? 2011 Parkwood Capital, LLC. All Rights Reserved. 29