A Calendar strategy can be employed in many vehicles, we will use AAPL as an example today. AAPL is at $604 as I write this, and although it may move a little higher or lower in the next few weeks, I think it will not move far from $604. Here is my idea. Buy 1 August 605 call and sell 1 July 605 call ( about 9 days from expiration). The spread is going for around $15.60 ( $1560 for 1 spread, expensive because of high price of AAPL). This idea can be used in cheaper stocks, same principle. The option volatility is around 33 for August option and 26 for July option.
Why the disparity? Earnings will be reported in AAPL after expiration of July options so July options won’t be affected and consequently will trade at a lower implied volatility. August options will be front and center when earnings arrive. The option volatility on August options is high and will continue to climb because AAPL can really move during and right after earnings.
What does this mean to me as a retail options trader? It means one of the 2 foes you face as a calendar trader, price and implied volatility, will probably not be a foe during the length of the trade. Option Volatility risk (also call implied volatility) will be minimal at best, in my opinion, because August option volatility will stay pumped and July option volatility will stay low.
Does this mean I will make money ? Not necessarily, you still have one more foe to deal with, price movement. AAPL doesn’t usually make big moves before earnings, but it can! If a stock is channeling and relatively on good behavior 1-2 weeks before earnings in AAPL, then this trade makes sense to me.
What would my plan be? Put the trade on now and keep it on to the latest, next Thursday July 19, one day before expiration. Hence, if the trade is still on, I would take off the entire trade.
Risk management plan while trade is on? If I paid around $1560 for the trade, I would be looking to exit the position for around a 10% profit, or $156 on one contract.
What would I do if the trade went against me? If I didn’t want to fiddle with adjustments, I would simply take off the spread if the price moved outside the expiration breakeven points of around $590 and $620. This would give me almost 15 points either way before I would have to exit the trade.
What adjustment might I use if I was contemplating adjustments? I might move the entire calendar. For example, I initiated this position with the 605 strike. If AAPL reached $620 I might move the position up to the 620 calendar. On the downside I would take off the original $605 calendar and move it to the 590 strike in the puts if AAPL reached $590. There are other calendar adjustments, but this was merely one example of what I might to.
How long am I looking to stay in this trade? About 1 week, would take off at latest on July expiration Thursday.
Keep working on the craft! Put this on as a paper trade for next week to see how this trade works and e-mail me your feedback or questions, that’s how you get better!