Okay, this Calendar Options thing sounds great, right? Yeah, we think it does. Later in this post we’ll tell you how Calendar Options is going to work—but before you go out and open up half a dozen 10-contract positions, there are a few things you need to know, at the very minimum, about trading calendar spreads. Even though they resemble iron condors in some ways, those longer-expiration options lead to some very important differences:
- Calendar spreads are almost always net-debit trades, which means that we won’t have as much cash sitting in our account earning interest. . .but at current rates, that’s kind of a joke anyway.
- Because calendar spreads have less distance between the break-even points, adjustment is an important part of the strategy. In our view, this is a plus, because we can change the profit curve of a position in the middle of a trade, or roll out the short side to get more profit (or give a position that’s in the red more time to recover). But the trade-off is that we often pay an extra commission or two, and we need to keep a little extra free cash in our account.
- Adjustments often involve moving half of our contracts to a new strike. This can work just fine if you adjust, say, 3 out of 5 contracts, but to keep things simple, you might want to trade in even numbers. We generally like to start with at least 4 contracts (so we can split the position twice, if necessary).
- Having “long vol” can be great, because when implied volatility goes up, so does our profit curve. But positive vega can work against us too. Volatility risk can reduce or eliminate the profit potential of certain calendar spreads—or, in extreme cases, lock in a loss—if implied volatility plummets unexpectedly. Our goal is to minimize volatility risk by entering positions only when the profile is right. . .but ya gotta understand that we can’t guarantee what the future holds.
- Your net debit is your theoretical maximum loss. We’re going to be disciplined with our stop-loss rules, trying to keep any one loss small enough that it won’t take more than one or two successful trades to make it up—but, as managers of some now-defunct hedge funds know, the worst can happen. Never risk more than you can afford to lose. You should start with small positions (or, better yet, paper-trade) until you’re confident that you understand calendar spreads and their adjustments.
The Plan
We’ll post more details about the Calendar Options strategy and trading rules as time goes on. But perhaps the best way to get a feel for how this is going to work would be to follow our real positions. To that end, our plan is to publish Calendar Options trades for the next month or two as free Bonus Trades, with two key differences:
- We’ll follow up by publishing closing trades and any necessary adjustments, and
- We’ll track our trades’ performance as if they were subscriber trades. But they won’t be auto-traded.
Now, we’d love to be able to teach you all about calendar spreads purely for the good karma, but let’s face it: developing and maintaining a new service that lives up to Condor Options’ high standards is going to be a lot of work for us—and a lot of value for you. After you’ve had a chance to see how you like the new strategy, we’re going to continue Calendar Options as a subscription service like Condor Options. But don’t worry—to get you started, we’ll offer discounted introductory rates, as well as breaks for members who subscribe to both Calendar Options and Condor Options.
We plan to publish our first official Calendar Options trade next week. So unless implied volatility spikes higher across the board, you can look forward to seeing an Open Trade Alert, perhaps as soon as Monday.