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Options Strategies Long Call Calendar Spread

 
 

Calendar spread, as it implies, uses the time difference between same component characteristics such as strike and contract. The strategy benefits from the neutrality, time passage, and increase in IV values. This strategy is also one of the most popular among traders and known as one of the 'income strategy' and 'delta neutral bias'. Its popularity is because of its simplicity; you just need to follow some simple rules to set it up. Furthermore, strategy management is easy because it gives some space to the trader enabling him or her to maneuver on occasional price and volatility events.

This strategy needs also to be monitored not more than a once a day basis. The basic rules are to choose not too volatile a stock or other instrument; and never enter a trade just before any critical news or an announcement, such as earnings, FDA approves or disapproval of a blockbuster drug or a medical instrument. Alternatively, there are kinds of instruments, which are sensitive to critical macroeconomic news, such as interest and unemployment rates oil and gold prices and so forth.

Implied volatility should be below the midrange; this way it gives the strategy an IV upside potential, as you will see that the back month is much more Vegas and less time decay and on the other hand, because of the strategy sensitivity to IV, there is not much space to decline. As said before time is the main factor for this strategy and as time goes by the positive theta will generate income.

Scenarios that can happen, such as a sharp move up or down, we will consider as follows: if the move happens on the first days of the strategy initiation then it means that poor income from Theta. However, maybe because of the sharp move, there can be an increase in the strategy and its IV value.

There are a few things you need to take under consideration. One, is this move ending and from this day forwards is the stock is going to converge to the mean? Namely, it will pull back. If yes, then do nothing, or if you think that the stock is going to keep going on the same direction then there is nothing you can do, get out of the trade. If you think that the stock might stay in this price range for the rest of the days to expiration, then, you need to fix this position.

  
 

 
 

There are two main methods to fix this position: first, adjust a part of the strategy to the next strike, near the stock current price. A partial adjustment means calculating the preferred new delta position; for instance, if you think that there is a chance that the stock will moderately pull back from the upside that you ought to leave some minus deltas, and if it will pull back from the downside.

Second, there is another possibility to buy out of-the-money calls adding positive deltas, if the position's deltas moved to the negative side and buy puts out of the money for negative deltas if the position moved to the positive side. As for the strategy's delta calculation, it acts upon the opposite of the stock price activity, meaning, if the stock rises then the total delta calculation turns negative, and you are more favor of a stock pull back down. If the stock declines then the total strategy's delta calculation turn positive, now you are more in favor of a stock pull back up.

One more way to fix the deltas is to sell or to buy the actual stocks, meaning if you are short delta then you will buy stocks, and if you are long deltas, then you sell some stocks. This strategy you should practice by yourself after you understand thoroughly the above two actions.

Taking what we have learned one step further, playing with delta calculation can help you set a more favorable strategy. If you think that by the expiration the stock will decline to a certain price then you can set in advance the strategy containing negative deltas, say, maybe a strike lower than the current stock price leaving a downside space to the stock, and if you are right with this outlook you get to gain from three sources:

1. The negative deltas are just as you are in a short stock position by the numbers of the delta. Let us say the strategy is minus three deltas; that means you are short 300 stocks, and as you know a decline benefits the short position.

2. The second source is time. As you know, time is supposed to be the main factor to that income-generation strategy.

3. The third source: a decline in the stock price usually inflates an option's price but less in the front month and more in the back month; this situation will at least will cover the long option's time decay if not more than that.