Using Expiry and Neutral Market Movement to Your Advantage with High Probability Trading
Calendar spreads are a simple and highly recommended ingredient for any options trader’s portfolio. The mindset behind this type of diversification is that it takes a strategy to make money in any type of market, whether the market is going up, down, or sideways. There are many simple strategies for when the market goes up and down, but sideways is usually a bit more complicated and less well known. That’s where calendar spreads come in handy.
A calendar spread consists of buying a LEAP call option with one or two strikes out of the money and then selling a front month option at the same strike price. Calendar spreads work by manipulating the value of the time decline in options in favor of your spread and against the option you are selling. Since about 80 percent of all options typically expire worthless out of the money, it pays to play a spread that benefits from that expiration.
As mentioned above, calendar spreads are a neutral options trade. They depend on the underlying remaining at or around the strike price originally purchased on both options. Assuming it stays at the same strike price until expiration, what will happen is that the previous month’s option will lose all of its value having expired out of the money, while the jump option you originally bought will have retained most of its value. its value ever since. its value is still primarily defined by the time it has until maturity.
So, in essence, this trading strategy allows you to buy option time at a wholesale price and sell it back to a speculator at a retail price in this option strategy. Options experience the most drastic reduction in value in the first month, so the premiums you charge will undoubtedly pay a higher value than the long-term options you are buying to cover yourself in the event that your stock is exercised or you have to buy it back. options trading.
When trading on calendar margin, I recommend looking for the following indicators before entering a trade:
1. Relative Strength Index between 30 and 70 during the last 2 to 3 months. Any extreme turmoil or signs of volatility are a bad sign to play an extended schedule. Look for a stock that has had a controlled RSI for the past several months and has no significant momentum breaks in either direction.
2. Range-limited price action over the past 2-3 months. If you can adjust the price action of a stock for an options trade on a box with the price bouncing off the top and bottom edges of the box, then you have a stable enough stock to place a calendar spread. Look closely for Bollinger band breakouts or unusual rallies in the Stochastic to help confirm this.
3. No historical signs of breaches. If this is an asset that opens every time an earnings report is released, then you want to avoid it altogether unless you know the timing well enough to determine that any game-changing fundamentals are outside the scope of your trading. options.
4. Implied volatility below .8. Generally, implied volatility measures the expected range of future price action, with 1 being the average of all assets within the market. Your calendar margin must be placed on an underlying that has a reasonably low implied volatility, well below the market average. High volatility could threaten your margin and cause you to lose money, so be careful and avoid this particular pitfall.
