Tuning a trade to your expectations. One of the most versatile strategies is the calendar trade.
What it is – The standard calendar has a longer term long option and a shorter term short option both out of the money (OTM). The options are of the same type, call or put, and at the same strike.
How it works – The trade makes money with delta and with theta.
What type of equities work best with it- Calendars work best on equities with implied volatility (IV) above 20 but don’t gap unexpectedly.
How it’s used – Calendars can be “tuned” to your expectations. They can be a low cost alternative to owning an equity. They can be used to “protect” an equity position. They can be added to exiting positions to adjust a losing trade into a winner or just to “supercharge” your returns.
When I started studying options trading I didn’t have a lot of money. I asked my instructors what might be the best way to meet my goals. Several suggested calendars so I started studying them. I spent many hours testing calendars. I looked at calendars with 6 month out longs and calendars with short term longs. I looked at the placement of the short, at the same strike as the long and at various strikes closer and further from the money. I learned just how “tunable” these trades are.
The placement of the options determines just how your trade will react to a move in the underlying. You can place them for more delta and less theta or less delta and more theta to match the move you expect. If the market doesn’t do what you expected, just move the short to adjust to the new expectations. So if you are expecting a big move, use a calendar with more delta and less theta. Expecting a slower move? Use a calendar with more theta and less delta. Expecting a sideways move? Use a calendar with very little delta but lots of theta. Whatever your expectations a calendar can be structured to benefit.
I prefer setting my calendars up with the long out at least 72 days and my short in the front month. I’ve played calendars using weeklies for the short and the long less than 72 days out. Those are a bit more challenging though.
My favorite calendars are the bull call calendar and the bear put calendars. Some refer to these as diagonal spreads. The bull call calendar has the same structure as a calendar except the short call is at a higher strike than the long call option. The bear put calendar has the short put at a lower strike than the long put. These trades fair better with a strong move in the underlying than a calendar with the long and short at the same strike. The compromise is that they have less theta and have a higher risk.
Bear put calendars can be great choices as a lower cost alternative to long put alone to protect a long stock position on the right stock. They can be great on slower moving equities but should be avoided on equities that gap on news when used as protection for an equity position. They can be a great adjustment to long puts after a gap down on earnings. On lower IV equities it is typically best to place the long put slightly in the money (ITM) and the short put OTM. Take profits when the short goes ITM. Add a new bear put calendar if you believe the move will continue.
Most people seem to trade bullish more readily than bearish. A great way to make extra money on an equity that you are already trading is with call calendars. The only way to really book profits on a stock position is to sell it. If you sell it you can’t profit if it moves up further. If you use call calendars, bull call calendars or just call calendars, you can take profits as often as you like and still benefit from the upward movement or even a sideways movement. Start with calendars that cost say $5, sell them when they are worth $6 and open a new one that costs $5. Do that over and over and before long you are only risking money that you have made.
Another calendar strategy that seems popular is to buy a longer term option, more than 3 months, and sell shorts on a monthly basis until the long expires. Some might call this a synthetic covered call. On the right equity and in the right market this can be a very profitable strategy that allows you to pocket cash on a monthly basis.
As you can see, calendars are a very tunable trade. Master them and you can trade any market in any direction.