TT - KYO: AAPL Calendar, 02/24/14

TastyTrade - Know Your Options

LIZ & JNY explain how a calendar in AAPL works.

What is a Calendar spread?

1. You sell the front month and buy the back month of the same strike.
2. Since you are buying the more expensive option, your risk is the debit that you pay.
3. Make sure your debit is less than the value of the short option, as this is used to forecast the future value of the Calendar.

How do Calendar spreads make money?

1. IV increases, or
2. The underlying moves to your strike at expiration, or
3. Time passes without the underlying moving.

• Calendar entry criteria:
• Low IV Rank!
• Open on Monday following monthly expiration Friday.
• Front month DTE should be around half of the back month DTE.
• Generally choose the first OTM strike.
• You want the underlying to go to your strike, but not through it.
• If it does you should close.
• Exit:
• Home Run: at expiration the underlying is at your strike, and you close out.
• Foul Ball: the underlying moves far away from your strike by expiration. Close out if your strike gets passed by.

TT - MM: Desperado, 02/20/14

TastyTrade - Market Measures

During periods of extended rallies and low IV we may look to trade calendar spreads. With a directional bias, we wanted to test how lower probability calendars compared to ATM calendars as well as put debit spreads.

We tested downside put calendars into up moves (up 5% in two weeks) over 5 years in IWM and EWW.

You can easily see that buying a calendar that is 1 strike OTM outperforms the other "cheaper" calendars.

TT - WDIS: Strategy Checklist, 12/06/13

TastyTrade - Where Do I Start?

TT - KYO: The Greek o' the Week is Vega, 08/19/13

TastyTrade - Know Your Options

Vega shows how much an option will gain or lose for every 1 point change in volatility. The ATM strikes will have the greatest Vega, while the shorter expirations will have the least.

In the table above, the Sep 148 Call and Put both have a Vega of .17. If the IV increased from 13.87% to 14.87% then the 148 Call and Put would both gain .17 in extrinsic value. Likewise, if IV were to decrease to 12.87% then they would both lose .17 in extrinsic value.

Vega plays an important roll in Calendar spreads where we sell a Call or Put in the front month and buy the same option in a later month. Since Vega is always lower in the front month, an increase in volatility would help our long position more than it would hurt our short position. A Oct/Sep 148 Calendar would gain .07 (= .24 - .17) if volatility increased by 1. Conversely, a decrease in volatility would hurt the long position more than help the short. The same Oct/Sep 148 Calendar would lose .07 (= -.24 + .17). For this reason we should only trade Calendars when IV is likely to go up.

How do Calendar spreads profit? The Sep options expire in 32 days while the Oct options expire in 60. So, we can estimate that at September expiration the Oct options will be worth what the Sep options are worth now. Thus, we can estimate that when the Sep 148 Put expires, the Oct 148 Put will be worth 1.50. If we were to pay significantly less than 1.50 for the Calendar then we should be able close it for a profit in 32 days.

Here we can see that we can BTO the Oct/Sep 148 Put Calendar for .96. Since it could be worth around 1.50 at September expiration that gives us a profit of .54 and a ROR of over 50%!