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Calendar comparison: The Good, The Bad and The Ugly

by Uncle Bob Williams

OPEN TRADES

Calendar Comparison: The Good, the Bad and the Ugly

We placed 3 Paper Trades based on the closing price so we can compare the how these different Calendar spreads perform over a few weeks.

WARNING: These are AGGRESSIVE trades and the probability of loss is HIGH. These are only learning examples.

- - - SUMMARY - - -

The GOOD: SPX (screen shots of the Trade Finder and Trade Monitor are below)

=> SPX at purchase: 1,413.49
=> SELL Sept 1400 Call | BUY Oct 1400 Call
=> Price: $11.00
=> 14 Day Yield: 26.2% | Expiration Yield: 120%
=> IV: 12.9%, this is near the low for the range, which is good.
=> Notes: The SPX has risen recently, so we placed our Short Strike below the current price anticipating a pull-back. The 14 Day Yield on this trade is good, but the break even points are a little to close based on recent price movements.

- - -

The BAD: AAPL

=> AAPL at purchase: 668.87 (This is near the all time high of 674 a few days ago)
=> SELL Sept 660 Put | BUY Oct 660 Put
=> Price: $10.00
=> 14 Day Yield: 16.4% | Expiration Yield: 112%
=> IV: 27.3%, this is high and above the Mid point of the range, which is bad.
=> Notes: AAPL rocketed up recently to reach all time highs. We placed our Short Strike below the current price anticipating a pull-back. The IV value is too high for a good Calendar spread, and price movements have been extreme. If the price levels out, the IV could come down which would hurt this trade.

- - -

The UGLY: FB

=> FB at purchase: 19.44 (This is near the all time low. We are placing 2 trades so we don't have to guess the direction of FB.)
    * * trade # 1 * *
=> SELL Sept 19 Call | BUY Oct 19 Call
=> Price: $0.47
=> 14 Day Yield: 22% | Expiration Yield: 140%
    * * trade # 2 * *
=> SELL Sept 20 Call | BUY Oct 20 Call
=> Price: $0.50
=> 14 Day Yield: 22.4% | Expiration Yield: 135%
--
=> IV: 53.1%, which is at the low end of the range, which normally is good. But, in this case it's too high for a good Calendar.
=> Notes: The FB price is below our $70 minimum for Calendar spreads. The Breakeven points are too close for a stock with this much price volatility. It's possible this trade could make a profit, but we wouldn't bet on it.

- - -

Screen shots from the Trade Finder and Trade Monitor are below for reference.


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AFTER 1 TRADING DAY

Only 1 trading day into these trades, and they are already performing according to their names.

Screen shots from the Trade Monitor are below for reference.


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AFTER 4 TRADING DAYS

The calm market prices turned this trade into The Good, The Good, and The Fair. But we'll keep the trades open and see what happens over the next week.

The market has been stable, which is perfect for Calendar spreads and after 4 trading days they are showing profits.

SPX = 9% profit. We would let this trade continue in a real trade.

AAPL = 5.3% profit. We would let this trade continue in a real trade.

FB = 0% profit on the 20 strike, and 14.9% profit on the 19 strike. The price of FB dropped closer to the 19 Short Strike which accounts for the profit jump. Given the original risk on this trade, we would exit early and lock in the profits. The break-even range for these spreads is very small. As a Paper Trade, we are going to continue to watch what happens.

Screen shots from the Trade Monitor are below for reference.


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AFTER 6 TRADING DAYS

6 trading days into these trades, and they are performing almost according to their names. In all cases we will continue to keep the Paper Trades open so we can watch what happens.

SPX = 16.8% profit. We would exit this trade now to pocket the profits in a real trade.

AAPL = 9.5% profit. AAPL pulled back closer to the Short Strike which is accounting for most of the profit. Given the price volatility, we would probably exit now to lock in the profits in a real trade.

FB = -32% loss on the 20 strike, and -6.38% loss on the 19 strike. The price of FB dropped which accounts for the loss. In a real trade at this point, it would be best to exit with the loss now and not risk further losses.

Screen shots from the Trade Monitor are below for reference.


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AFTER 7 TRADING DAYS

7 trading days into these trades, and they are performing almost exactly according to their names. In all cases we will continue to keep the Paper Trades open so we can watch what happens.

SPX = 22.7% profit. Yes, we would have exited at the 16.8% profit mark to lock in the profits based on the Market price swings which were a little to aggressive. Calendars can produce amazing profits if everything goes right. You can always remove part of your position to lock in part the profits and go for greater profits as long as you can monitor the position. We are keeping this open to watch what happens.

AAPL = 2.0% profit. AAPL rose which eliminated the profit we had previously. AAPL will reportedly will announce the iPhone 5 next week, which is a double edge sword on this trade. The Volatility of AAPL Options may rise in anticipation of the product announcement which would be great for this trade; rising IV is good for Calendar spreads. On the other hand, the price of AAPL may rise further which would be bad for this position.

FB = -40% loss on the 20 strike, and -10.6% loss on the 19 strike. We would have exited these trades previously. We are keeping them open in the Paper Trade to watch what happens.

Screen shots from the Trade Monitor are below for reference.


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AFTER 9 TRADING DAYS

What a difference a day makes. The Market price jumped up 2% and it flipped these trades upside down. In all cases we will continue to keep the Paper Trades open so we can watch what happens.

SPX = 12.7% LOSS. We warned previously that it is a good idea to take profits early, and this is a perfect example to show why. The Market jumped up 2% on good news, and our profitable position is now showing a loss. We are keeping this open to watch what happens.

AAPL = 3.2% profit. AAPL rose slightly resulting in a minor change to this position.

FB = 0.0% profit on the 20 strike, and 19.1% profit on the 19 strike. FB rose the last 2 days based on good news (different news than what propelled the Market), and it turned these losing positions into profitable ones - but in this case it was the result of a 10% rise in the stock price in 2 days which is very unusual. Lesson: Don't count on the price rising 10% in a few days to save a bad position. We are keeping them open in the Paper Trade to watch what happens.

Screen shots from the Trade Monitor are below for reference.


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AFTER 10 TRADING DAYS

10 Trade days in. The Market was relatively flat on Friday, but these positions continue to head in the opposite direction. In all cases we will continue to keep the Paper Trades open so we can watch what happens.

SPX = 23.2% LOSS. The SPX rose 5 points, which was past the breakeven point for this trade. The losses are rising fast. However, if the SPX pulls back it will put this position back into the profitable range. Additionally, a pull back will increase the IV value which will further add to the profits. But don't trade like that in a real trade - hoping for a market correction when the losses are mounting, is a really poor trading strategy. As we mentioned previously, we would have exited this position many days ago when it was showing a healthy profit.

AAPL = 1.0% profit. AAPL also rose slightly which reduced the profit. This position is now very close to the upper breakeven point.

FB = 0.0% profit on the 20 strike, and 21.3% profit on the 19 strike. FB was flat on Friday so these positions are almost the same.

Screen shots from the Trade Monitor are below for reference.


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AFTER 12 TRADING DAYS

12 Trade days in. The Market dropped on Monday and these positions continue to head in the opposite direction. We have been in these trades for 20 days. Normally, Calendar spreads are held for 14 to 21 days. In all cases we will continue to keep the Paper Trades open for a few more days - especially to see what happens with AAPL after the iPhone 5 announcement today. Aside from what might happen to Apple, I think at this point we've extracted most of the lessons from these positions.

SPX = 17.3% LOSS. The SPX pulled back slightly since last week, and we are now close to, but within the breakeven point for this trade. As we mentioned previously, we would have exited this position many days ago when it was showing a healthy profit. If we were at this point in a real trade, we would exit and move on to a new trade.

AAPL = 18.6% profit. AAPL pulled back and this position is now at our Short Strike, which is the most profitable point of a Calendar spread. Apple will announce the iPhone 5 later today, if we were in this position live, we would exit now and pocket the profit. A big product announcement will probably move the stock price up or down, either direction will mean a drop in profit for the short run, and we are already 20 days into this trade. (Calendars are generally held for 14 to 21 days.)

FB = 20.0% profit on the 20 strike, and 34.0% profit on the 19 strike. Facebook rose since last week and these positions are now showing amazing profits. Was that skill and patience? Not by a long shot. This was the "ugly" trade, and as we saw earlier it went bad quickly when Facebook dropped 10%. Now Facebook rose just as quickly, and out of sheer luck these positions are showing a profit.

Screen shots from the Trade Monitor are below for reference.


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AFTER 14 TRADING DAYS

14 Trade days in. The Market jumped yesterday based on the Fed's open ended QE3. Big price jumps are generally poor for Calendar spreads, and we will assess the damage below. In all cases we will continue to keep the Paper Trades open so we can watch what happens up until the day before expiration.

SPX = 60.9% LOSS. The SPX price is now far past our breakeven point, and if that wasn't bad enough there is now a bad IV Skew. Look at the loss amount again: - 60.9%, ouch. We may seem overly cautious and timid traders at times, but it is exactly trades like this that underscore the importance of trading smart and exiting when you've reached a healthy profit. In this SPX trade, we recommended exiting when the profit was over 16%, and we would have walked away happy. A more reckless trader would have seen the quick profits, and hung on longer to squeeze more money out of the trade. Sometimes that strategy can work, but sometimes it can turn around and bite badly as this trade has shown. It is very possible that the Market will calm down and pull back, we will keep this open to see.

AAPL = 5.9% profit. AAPL rose 3% over 2 days. This position is now very close to the upper breakeven point, but it is still has a decent profit which shows the better side to Calendar spreads. We've been in this trade for a while which has built in 'Theta' profit and given this trade a little more room. This is double edged sword because it might tempt to stay in the trade longer, but with a position this close to the breakeven point it would be wise to exit.

FB = 32.0% profit on the 20 strike, and 4.26% loss on the 19 strike. FB rocketed up along with the rest of the Market. Just note the massive profit / loss swings on these trades which were very aggressive.

Screen shots from the Trade Monitor are below for reference.


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AFTER 15 TRADING DAYS

15 Trade days in. The Market continued the jump up based on the Fed's open ended QE3, but then started to correct around mid-day resulting in a small gain for the day. In all cases we will continue to keep the Paper Trades open so we can watch what happens up until the day before expiration.

SPX = 66.4% LOSS. The SPX price continues to blast past our breakeven point. It is very likely that the Market will calm down and pull back, we will keep this open to see what happens, it's possible that this position could still be profitable.

AAPL = 15.1% LOSS. AAPL continued to rise and continue past the breakeven point for this trade which resulted in the current loss. The iPhone 5 pre-orders were sold out in 1 hour, compared to around 20 hours for the iPhone 4 and 4S, so the Market is still giddy over AAPL. We continue to watch and learn how Calendars react with this position.

FB = 0.0% profit on the 20 strike, and 36.2% loss on the 19 strike. FB continues to rise. Just look again at the massive profit / loss swings on these trades, which is why we called them the 'ugly'.

Screen shots from the Trade Monitor are below for reference.


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AFTER 17 TRADING DAYS

17 Trade days in. The underlying prices are far above the breakeven points which accounts for the large losses. We are only holding these Paper Trades open for the next 2 days to see what happens as we approach expiration. We will close them all on Friday morning. Remember that stock settled Options trade until the close on Friday.

SPX = 62.7% LOSS.

AAPL = 42.4% LOSS. AAPL continues to rise...

FB = 6.0% profit on the 20 strike, and 25.5% loss on the 19 strike. Look again at the massive profit / loss swings on these trades.

Screen shots from the Trade Monitor are below for reference.


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AFTER 19 TRADING DAYS - CLOSING POSITIONS | EXPIRATION DAY

19 Trade days in. The underlying prices are far above the breakeven points which accounts for the large losses. Today is the Expiration day and we are closing these Paper Trade positions.

These positions acted according to their names in the beginning of the trades as anticipated. Then the Market shot up like a rocket and the good trades got ugly quickly, which reinforces the importance of closing positions when you've reached your target profit / loss amounts. Greedy traders are sloppy at risk management which generally results in losses instead of consistent profits.

SPX = 73.2% LOSS.
Note the IV Skew: 42.3%!
This is one the reasons we don't hold Calendar positions until expiration, the massive IV Skew can turn a profitable trade into a loss.
We recommended to exit when this position was showing a 16% Profit.

AAPL = 42.7% LOSS.
Note the IV Skew: 19.9%!
We recommended to exit when this position was showing a 9.5% Profit.

FB = 14.0% loss on the 20 strike, and 36.2% loss on the 19 strike. Look again at the massive profit / loss swings on these trades.

Screen shots from the Trade Monitor are below for reference.

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