Friday, 27 July 2018

Calendar Spreads using Put Options


As I am not too happy with the results, I have not deployed any Iron Condor lately. Nor I have had the chance of deploying a Put Spread, which is a trade that I am much happier with.

In the meantime I have been reading about Calendar Spreads and done a bit of paper trading with them. Today I would like to share my thoughts on them.

Note: This is not meant to be a proper study on Calendar Spreads, just some notes I have compiled on the way. Any serious study on a trading strategy requires a proper set of back tests.

Example Trade Setup: Positions opened, days until expiration (DTE) and debit invested

The calendar spread is composed of two positions (in this example PUT options for the German DAX30 - ODAX):
  • Same strike price: 12500 points in this case.
  • Different lifespan: A shorter one, using the front month (32 days) and longer in the other, some three or four months in the future (158 days).
  • Short/long: You sell the front option and buy the option in the future.
As the option in the future has more time value, this results in an overall debit.

For instance, this is the current status of a "paper trade" that I have simulated for a couple of weeks:

Long PutDecember 12500158-43,581,6231,82€-390€
Short PutAugust 125003235-3,6811,8390€

Results in this profit/loss graph:

The orange line is the profit/loss at the expiration date of the short option, while the blue line is displaying the profit/loss 9 days after opening the trade. Note that the amounts are all multiplied by 5 here as each ODAX option represents 5 contracts (or 5€ per point).