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BookingAlpha Option Trading Advisory

Tuesday, July 8, 2014

Closed July 2014 SPY Put Calendar spread

On May 29 (40 days ago) I bought an SPY 191 July/August Put Calendar spread. You can see the trade here. The idea back then was to simply make a bet that volatility (VIX) was too low and it should go up at some point in the next fifty something days. Also the market was entering overbought territory and I felt that was a good, and conservative bet. If the market kept going up, I would add another Calendar spread at higher strike prices to expand my profitability zone.

The market kept going up, volatility kept going down. 12 days later SPY price was starting to move out of the profitability area of the 191 Calendar spread (around 195.50). At that point I added the second calendar using 197 as the new strike price. You can see the details of that trade here. That trade completed the 191/197 July/August Double Calendar spread.

Well, let me tell you that for 39 days in a row this position was in negative territory. Not showing a profit at any point at all. It was only today, after 40 days of patience that it started to show a profit, which I took.

Buy 2 SPY July 191 Put @0.27
Sell 2 SPY August 191 Put @1.21
Buy 2 SPY July 197 Put @1.56
Sell 2 SPY August 197 Put @2.86
Net Credit: 2.24

The 191 Calendar had been entered for 1.07 debit and closed for 0.94 credit, a 0.13 loss (or $26 in 2 contracts).  The 197 Calendar was initially entered for 0.98 debit and was closed for 1.30 credit, a 0.32 profit (or $64 in 2 contracts). Overall, the cost of the Double Calendar spread was 2.05 debit and closing it for 2.24 credit yields a small 0.19 profit, that is +8.5% return on capital invested. Very small winner but worth trading.

The reason why I closed was because I was tired. Tired of 39 days seeing the position in negative territory. The profitability area had  shrunk, and the max profit potential had also gone down from about $300 at the beginning to barely $150, all due to the fact that volatility kept consistently going down.

The good thing about Calendars is that they are very slow moving creatures and even though I was in negative territory the whole time, it was a small amount, never more than $40 dollars (for the model portfolio). That's why it became easy for me to hold it all this time, as long as the price of SPY stayed inside my profitability area.

I probably should have left the position open now that we're close to expiration and the front month options lose value more quickly. Some experts out there suggest 15% - 25% return con capital invested as something to aim for with calendars. But fuck it! Tired of 39 days in a row seeing a negative balance.

This was not a bad trade in the end. I never felt like I could really harm the portfolio with this position, and that's a great thing about calendars. They are noble creatures, and that makes it easy to pull the trigger with them. They're not like vertical spreads where you feel your life is really on the line. I will continue to trade them, but right now is not the time. For now I just feel comfortable with Put Calendars (not Call calendars) and only when the markets are nearing short term overbought territory.

Check out 2014 Track Record

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  1. Nice write up. I am interested in expanding my knowledge beyond vertical spreads and will be learning from you on calendar spreads. I will start to buy shares of IWM when we are very oversold 2 to 4 times a year. I think I can earn a decent return if I can capture 8% to 10% gain during these times. I have a margin account and it would not cost me much to go long a few hundred shares of IWM during these periods. I can use those shares to sell bear call spreads when we go to overbought again.

  2. That's indeed an interesting idea, because if things go wrong and IWM keeps falling, your loss is negligible in terms of % of capital invested. Let me tell you something. The fact that I'm invested in 8 Canadian companies and 7 American ones (dividend payers) has made it a heck of a lot easier to ride this market in the last two years. When my credit calls spreads have taken some hit, I'm always happy because my investments in stocks are doing pretty good! So, yes, I agree that ding only options is not necessarily the way to go. Understanding different instruments can be of great help.