12.12.

2013

How to Ensure Success With Options Calendar Spread: 9 Steps

How to Ensure Success With Options Calendar Spread

Trading calendar spreads successfully is quite simple to do and can increase your earnings. Here's how.

Steps

Make sure you have software to plot your risk graph. When trading straight calls or puts or vertical spreads (all legs on the same month), it is relatively easy to work out

the max risk, max profit and break even point to draw risk graph. However, calendar is a horizontal spread that makes up of two different option months. That makes it almost impossible to manually and accurately plot your risk graph. So, you need software to do this. Utilize your free broker tools or sign up for a paid program. It does far more than just plotting risk graph such as modeling the implied volatility of the stock. This analyzes if you should trade this stock or not. 20% of the last year low in IV is the best.

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Your break even points range is at least 10% of stock price. This spread trades on stocks that move between an obvious support & resistance. It is recommended

that you structure your risk graph so that your 2 break even points cover the range of stocks movement. The best distance between these two points is 10% of stock price. For example, if stock prices at $30, your upside point should be $31.5 and downside point is $28.5. The wider, the merrier. It will increase your chance of winning. Also, when trading calendar you would want your stock to move less. Statistics say that stocks under $50 move a lot less than those above $50.

Max Profit to Max Risk ratio is at least 100% . Max Profit in this spread is the pointy head in the risk graph and your max risk is what you invest in the trade. This is

a very low risk trade so u would want at least 100% potential profit to make your time and commission worth it. 120% or more in potential profit is the best.

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Probability of Winning is at least 60% . Different traders will have different number to identify their worth-the-time trades. This author's probability for calendar is 60% to

make it worth trading. The higher is the better. 80% is the best.

Avoid trading thru earnings date. Earning potentially causes the stock to jump in either direction and out of your trading range. If you dont really care or think this is a

minor problem, do a research on the stock and see if it has historical record of jumping on earning.

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How to Ensure Success With Options Calendar Spread: 9 Steps

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Avoid trading through a dividends date. This author traded once thru dividend date. The risk graph completely crushed and collapsed. The author lost a bit more

than 50% of the trade before he/she was taken out by the pre-plan exit order.

Pre-set your exits at the two break even points. Pre-planning your exits, as you know, is the most important part of your trading. For calendar spreads, you have 4 exit

targets: 100% profit, 50% loss, upside break even and downside break even. You can do this easily by setting up an OCO order that contains 4 orders that aim at those 4 targets above. 100% profit and 50% use limit order. The other two utilize market order.

Trade with Puts. Generally, you should trade put calendar. This is because most of the time it is cheaper than calls. Also, in case of an exercise, a call option will force

you to short stock. This can be harmful if the stock pay dividends on the day you get exercise, you will have to pay dividend to the owner of the share you short.

Trade Back-To-Back Spreads. Back-To-Back means selling a nearest month option and buying the month right after that. When trading this spread, you would

expect the stock not to move. And if it does, you would hurt so much. The way to do this is make it gamma neutral or as close to zero as possible.

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Warnings
Larry Williams says not to invest more than 30% of your portfolio in options so that you will always have cash. If you have $10,000 and you invest 30% and lose it, you will have $7,000. If you then have $7,000 don't invest more than 30% which is $2,100. If you lose the $2,100, and you have $4,900, don't invest more than 30% which is $1,470. I had a friend that lost 6 trades in a row and lost all his money because he did not follow this rule. Options involve risk and no guarantee that you will make money at all in options trading.

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How to Ensure Success With Options Calendar Spread: 9 Steps

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