In my previous post, I went over the basics of our calendar-spread income strategy. Now let's look deeper into...
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…
Our positions for the June cycle were like Dr. Jekyll and Mr. Hyde. In general, it was another difficult month, in terms of falling implied volatility and, in the case of our IBM trade, an uptrend culminating in a whipsaw—but we still managed to break even: hitting the target profit for our SPY position made up for our IBM loss. And even though we underperformed the market for the month, we’re still outperforming handily over the long-run.
We’re a bit behind on Calendar Options reviews, so we’re making this one a double-header— quite apropos, as it turns out, because the story is much the same for April and May: A strong market uptrend and steadily falling implied volatility continued to work against us, but we still came through each cycle with a profit. That makes three straight months in which we’ve shown that a market-neutral income strategy using calendar spreads can work in trending markets, even when…
Traders with a background in stocks, futures, or forex are sometimes thrown off balance when they begin learning about options: one of the biggest hurdles is learning the various types of spreads, the risk characteristics of those spreads (i.e., the greeks), and how to think in terms of time, volatility, and price, instead of thinking in terms of price only. One frequent misconception is that different spread types are strategies in and of themselves. A reader sent in a comment…
Last month we made important changes to the Calendar Options service—changes aimed at reducing the odds of taking a loss like we did in January. The most significant change was to expand the scope of the newsletter, at least temporarily, to include double-diagonals, so that we’d have more opportunities to enter trades even when implied volatility is on the high side. (For readers unfamiliar with this exotic-sounding strategy, we’ve just made an excerpt from a Calendar Options post introducing the…
We often refer to the complementary nature of iron condors and calendar spreads, in that the former benefit from falling implied volatility, while the latter generally get a boost from rising IV. So does that mean you should balance out volatility risk by allocating as much capital to calendars each month as you do to iron condors? Unfortunately, it isn’t that simple.
First, it’s important to think about where implied volatility might be headed, especially when it’s at one extreme…
Volatility as an Asset Class: A guide to buying, selling, and trading third-generation volatility products, ed. Israel Nelken (London: Risk Books, 2007). Israel Nelken, one of the members of the CBOE New Products Committee, has collected 11 essays on the theory and practice of trading volatility as a distinct asset class. The first half of the book examines the measurement of volatility and ways to employ volatility models on several traditional underlying products. The second half is devoted to discussion…
Since our last Calendar Options bonus trade, we’ve been focusing on preparing the new site and the official launch of the Calendar Options subscription service—our non-directional approach to using calendar spreads as an income-generating strategy. But there’s another important reason we haven’t published a calendar-spread bonus trade since the July options cycle: volatility risk.
The Calendar Options strategy complements our iron condors because each offsets the volatility risk of the other. But unlike an iron condor, a calendar spread’s profit…
Here are some data that have us thinking this afternoon: maybe the Nasdaq doesn’t resume its parabolic move from here.
There are certainly plenty of short term reasons for Nasdaq bulls to frown and doze off for awhile: the QQQQs are up over 7% in 7 days. Money flow has been stagnant. The ADX line is only barely ticking up, and RSI readings at various periods are all inching toward overbought. The McClellan Oscillator (attached) may have peaked, and even…
Thursday, June 2, 2011
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