Bonus Trade: SPY October/November Calendar Spread

Fri, Sep 10, 2010

Bonus Trades, Calendar Spread

We kicked off the October expiration cycle for our Calendar Options newsletter yesterday with the following trade:

Day limit order
Buy to open 4 SPY Nov 112 puts
Sell to open 4 SPY Oct 112 puts
for a net debit of $1.42 or better.

This morning, the position is still mid-priced around $1.42.

Note that 4 contracts per leg is our base position size. Trading whole-number multiples of the base size ensures that adjustments will not result in unbalanced positions.

Analysis: With 36 days left until October expiration, we’re close to the center of our trade-entry time window, and implied volatility is nearly as low as it’s been in the past month (not that it can’t go lower, but it isn’t likely to by more than our strategy can tolerate).

Our price-level risk-management thresholds for this position are at about $107.75 and $116.25. If SPY closes outside that range, we’ll want to take steps to manage our delta risk. Note, however, that as a free Bonus Trade, this position is posted here on the public site as an example of the kind of trade we teach Calendar Options subscribers to manage in the paid newsletter. It is not a recommendation and is not intended as investment advice. In addition to entry trades, Calendar Options members receive notice of any necessary risk-management follow-up trades the instant we place our orders, as well as more detailed analysis of each trade on the members-only web site. There will be no risk-management follow-up or closing trade alert here on the public site, and anyone who chooses to participate in this Bonus Trade does so at their own risk.

The P/L curve for the trade at the time we were filled is shown below:

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Jared Woodard specializes in trading volatility as an asset class. With over a decade of experience trading options and other volatility products ... Read More


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