How to trade Calendar Spreads

Afbeeldingsresultaat voor calendarHow do you trade calendar spreads? A calendar spread combines a short option in a front month expiration and a long option a back month expiration. Both options are at the same strike.

The best time to set up a calendar spread is  when volatility is low. It is another strategy to collect extra option premium.

Calendars are uniquely as they benefit from both the passage of time and an increase in volatility.

How have calendars performed so far? Research shows that when you trade calenders that you have a probability of profit of 42%. That means that every 100 trades you only win 42 times. Your net profit is 0.01 per trade. The trade is closed when the short option expires.

 

Study on Calendar Spreads

We have the results of a study we did on Calendar Spreads that may blow your mind. It may lead you to put on some of these trades.

A long Calendar Spread combines a short option in a front month expiration and a long option in a back month expiration, with both options having the same strike.

A study was conducted using the SPY from 2005 to present. We bought Calendar Put Spreads by shorting the at-the-money (ATM) Put closest to a 45 days to expiration (DTE). The second part is going of this strategy is going long the ATM put in the next monthly expiration. The trade was held until the front month expiration.

Results of the long SPY calendar spreads are displayed. The table included the percentage of winners, average P/L per trade and biggest loss. The table showed that the average P/L per trade was essentially a scratch. This was not something to get excited about. But we preach the benefits of managing winners so we tested calendar spreads when managing winners.Calendars in low IV

A second table of long SPY calendar spreads held to expiration, managed at 25% and 50% of the initial debit paid was displayed. The results showed a dramatic improvement in average P/L per trade and percentage of winners when managed.

 

Since we also believe in selling high implied volatility (IV) and will buy IV when it is low we took the initial results and then filtered for a lower IV level. Those results had a much higher win rate and average P/L per trade.

How to trade calendars best

 

 

 

 

 

 

 

 

 

 

 

Another research showed that put calender spreads especially when managed at 10% of maximum profit. It was difficult to make profits in call calender spreads. Watch tastytrade market Meausers 17/02/14

Takeaways

Put calendars are typically a strategy added as part of a portfolio and not a core position. In this study, put calendars benefited from management using either the 25% or 50% of the debit paid as a target. Due to the nature of a put calendar, which benefits from an increase in volatility, these trades saw the best results when executed in low IV.

 

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