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2004issue C121

Range-bound calendar spreads and precommitted exits

A calendar-spread is only a candidate when the chart is sideways, short-dated richness is present but capped, and a stop-loss plus a separate profit objective are written before the first fill.

  • A calendar-spread buys a longer-dated option and sells a shorter-dated option at the same strike, looking for time decay plus leftover value in the long-dated leg.
  • The structure is screened for a sideways or oscillating chart, a volatility-skew that is rich but not larger than 40 percent, and a name in the lower portion of a one-year volatility chart.
  • Before the first fill, pair a stop-loss based on a chart level, a cash amount, or a percentage move with a separate profit-objective exit, then follow that plan once the trade is open.
  • Worked exits include a 5 percent adverse stop, 25 percent or 50 percent profit targets on a straddle or bullish option-spread, and a Merck case that closed after a 32.50 break.
Entries in this reading3 entries
Current trackCalendar spread trading19 readingsOption spread138 readingsStop-loss order297 readings

When a calendar-spread is on the table

A calendar, also called a horizontal or time spread, is built by buying a longer-dated option and selling a shorter-dated option so that time decay and possible appreciation of the long-dated leg can contribute to the result. In this workflow the calendar-spread is a same-strike option-spread: the longer-dated leg is bought and the shorter-dated leg is sold, seeking time decay plus leftover value in the long-dated option.

The structure is screened for a sideways or oscillating chart rather than a large volatile break. A sharp directional move is described as a condition in which the calendar does not work.

Selection screens

A volatility-skew that leaves the short-dated option much richer than the long-dated option is used as a selection filter, often around scheduled news. Skews larger than 40 percent are avoided as a sign that breakout-risk news may be pending.

Candidates are further limited to names in the lower portion of a one-year volatility chart. Contracts that include long-term equity anticipation securities are used when more listed expiration months are needed.

Delta and gamma as used here

Delta is the estimated change in an option’s value for a one-point move in the underlying. Gamma is the estimated change in delta when the underlying moves by one point. With delta 0.50 and gamma 0.05, a one-point rise is said to lift delta to 0.55.

Write the exits before the first fill

An exit procedure can pair a stop-loss based on a chart level, a cash amount, or a percentage move with a separate profit-objective exit. Once the trade is open, the chosen plan is to be followed.

Worked thresholds include a 5 percent adverse move as a possible stop and 25 percent or 50 percent gains as possible profit exits on a straddle or bullish option-spread.

The Merck stop-loss case

A bullish Merck option trade used a stop at 32.50. After the stock broke that level on 6 October on a product-recall headline, the options were closed at a loss. The shares later traded below 30, or 2.50 under the stop.

Educational research material, not investment advice. Historical source context does not establish present-day performance.
11 of 18 in the Calendar spread trading track
20071-1 pp.Next on Calendar spread tradingConstruct futures size from the good-faith deposit and the spreadFutures margin is a good-faith deposit the brokerage can apply against trading losses, not a cash down payment plus borrowed funds as in a stock purchase.
All readings on this track · 18 readings
  1. 1982Constructing commodity spreads, calendar legs, and option straps
  2. 1987Seasonal calendar spreads as financed capital slots
  3. 1989Seasonal dates, confirmation, and reconstructed spread bars
  4. 1991Calendar-spread divergence as a demand clock for commodity reversals
  5. 1992Expiration-forced convergence for basis, calendar, and option-income trades
  6. 1993Write the soybean intercrop calendar as one procedure
  7. 1996A commodity-basket redesign read as a proxy and a calendar-spread
  8. 2003Calendar spread construction by volatility skew
  9. 2003Livestock calendar spreads during a commodity-index roll
  10. 2004Same-strike calendar construction, decay income, and account gates
  11. 2004Range-bound calendar spreads and precommitted exits
  12. 2007Construct futures size from the good-faith deposit and the spread
  13. 2007Critiquing calendar spreads when reversals overrun
  14. 2010Name the spread, then construct the legs
  15. 2012Monthly calendar income under a volatility-regime process
  16. 2016A VIX calendar-spread case after the 2015 volatility spike
  17. 2017Yield curve kinks as spread laboratories
  18. 2018Bitcoin futures contract choice, percentage margin and calendar spreads
By fieldOptions and volatility435 readingsBy year2004180 readings
All 19 readings tagged Calendar spread trading
Also on Calendar spread trading5 readings
2007Critiquing calendar spreads when reversals overrun2010Name the spread, then construct the legs1982Constructing commodity spreads, calendar legs, and option straps1987Seasonal calendar spreads as financed capital slots1989Seasonal dates, confirmation, and reconstructed spread bars