LTOptions at a 33% discount during the Year End Holidays.
Tell me More

BookingAlpha Option Trading Advisory

Thursday, May 29, 2014

July 2014, SPY Calendar Spread

After studying Calendar spreads in depth for over a year, I entered the first one with real money today in a very low volatility environment:

Sell 2 SPY July 191 Put @3.08
Buy 2 SPY August 191 Put @4.15
Net debit: 1.07 ($214 in 2 contracts and maximum risk)
Probability of success: 38%
Days to expiration: 50
VIX: 11.57 at market close
IV Percentile of SPY was 17% when the trade was opened

Profit picture:
(Click on image to enlarge)
Calendar spreads are tricky, essentially because that profit picture can change every day, which is one of the reasons why I hadn't traded them until now. I just didn't feel confident enough.

My game plan here is simple: I want a 20% - 25% profit on the debit invested and I am betting that volatility will go up at some point in the next 50 days. A volatility increase will make those breakeven points expand and create a wider area of profit. As for the losses, I don't need to look at this trade as close as I do with my credit spreads which I defend and adjust. The $200 loss area (2% portfolio draw-down is above SPY 200). Again even if SPY gets there it will be a small loss.

According to how the market moves I may add a complimentary second calendar spread to this position. That is, if the market goes up, I may add a Calendar at higher strike prices  and vice-verse, effectively creating a double calendar, covering a wider profitability area.

After this trade the portfolio looked like this:
June RUT 920/930 Bull Put Spread $120 credit
June SPX 1710/1715/1965/1970 Iron Condor $320 credit (I closed the Call side minutes later)
July SPX 1735/1740/1975/1980 Iron Condor $320 credit
July SPY 191 Put Calendar spread with around $300 max profit potential

Check out 2014 Track Record

Related Articles:
Weekend Portfolio Analysis (June 7, 2014)
Weekend Portfolio Analysis (June 14, 2014)
Weekend Portfolio Analysis (June 21, 2014)
Weekend Portfolio Analysis (June 29, 2014)
Completed 191/197 Double Calendar on June 10, 2014 
Closed 191/197 Double Put Calendar spread for profit on July 8, 2014 

Go to the bottom of this page in order to see the Legal Stuff

1 comment:

  1. This is an interesting trade. I have traded a few calendar spreads but don't fully understand them. Good luck with this trade. I would be interested in seeing how you do with this and future trades.