Call Calendar Spreads

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Call calendar spreads: Tonight, I want to go over all of the trades that we’ve made today for Tuesday, December 30th. Only one more trading day until the end of the year which is just crazy to believe, but we were pretty active today and did a couple of the things that we intended to doing that we talked about in the strategy call with premium members on Sunday night.

With all the premium members, we always have a 30 to 45-minute strategy call on Sunday evening, preparing ourselves for the week ahead, and trades that we might be entering or things that we might be adjusting. Some of the things that we did today, we had talked about already before during that strategy call. Let’s start off with EWZ. And with today's video, we’re going to be talking mainly about the calendar spreads that we had.

We did have another vertical spread in gold, but the two calendars that we had in EWZ and EEM are really one in the same, so they’re both very, very similar, they’re both call calendar spreads, we’re playing both of these ETFs just a little bit directionally bullish and that’s just because we need a couple of bullish positions in our portfolio right now where maybe getting a little bit too tilted towards the bearish side with some of the positions that we’ve rolled off and taken profits on, so we need a couple more bullish positions to balance this out, and that's why we decided to go with the call spreads on these calendars.

We also decided to go with the calendars because implied volatility has been relatively low, so with things that we can’t usually get high implied volatility in. And EWZ actually has had an extended period back in October, November that it had really high implied volatility, but that’s calmed down and implied volatility is lower, so now we need to tailor the strategies that we’re picking to strategies that profit potentially from an increase in implied volatility or at least aren’t hurt from rising levels of implied volatility.

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call calendar spreads

With the calendar in EWZ, we went ahead and did the February, January 39 call calendar. That means that we’ve sold the front month contract which is January and we bought that back month contract which is February. We did this for a $55 debit, and that puts our pin price on EWZ right around 39. You can see here's a chart of EWZ and you'll see that 39 is just a little bit above where it’s trading right now, so just below 40.

And I’m drawing the line here on the chart. We do want EWZ to trade just a little bit higher. We’re playing this a little bit directional. When we go into the trade tab here, and you guys can see our position that’s in here now; I just wanted to highlight why we selected the 39 strike. And it’s mainly because it's got excellent volume and open interest in January, so the January options that we’ve sold had good size and public interest and there was enough of a premium there to decay.

Remember, we’re selling these front-month contracts, we want to make sure that there's enough value there to decay down to zero because that's our target, is to make somewhere around the value of those front month contracts which is about $25, $26. And then we decided to look out into February, and you can see that the 39 strikes were far and away the most liquid and most traded.

Now, I don’t know if that's because a lot of Option Alpha members are in there. I doubt that that’s everybody, but we have a lot of people here on the membership, so I’m sure a lot of people were getting in there and buying contracts. But with the volume and open interest that high, we just felt like that was a pretty good deal to get into because it was probably easy as far as entry and exit.

And it was easy enough to get into these today; we were filled within a matter of an hour between the time that we entered the order and the time we got the fill confirmation. When we go to the actual trade tab and analyze the risk profile, you can see that the market is trading right here right at our breakeven point right now.

This is more of a directional play, but we’ve got a pretty wide window of opportunity here, somewhere between about 36.75 all the way up to about 41.75. That’s our profit window, and ideally, we’d like to see the stock settle in somewhere around that 39 range. But we’re okay playing this will a little bit more directional than some of our other trades.

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The other trade that we got into today as far as calendars were EEM. We did the January, February 40 call calendar spread. We did that for a $.45 debit, so a little bit cheaper debit, but you can see we kept both positions sizes relatively small as far as what we were doing. Here's a look at what the chart was today of EEM, very similar to EWZ.

It had a little bit of a bounce off the bottom, and we’re looking for potentially just a slight move higher in the stock. When we go to the risk profile here for EEM, you can see that it’s a little bit different because we didn't sell or didn’t buy a calendar spread too far out of the money. And what that did is by doing just the 40 call calendar, that gave us a breakeven price that’s just a little bit below 39.

We've got a little bit of room between where the stock is now at $39.26 and our breakeven price for this stock actually to go down, and we can still make a little bit of money. That's a good type of setup, and that’s generally how we want these calendar spreads to be setup. And we did a huge webinar about this with the premium members, but as far as calendar spreads, this is an exquisite way to set it up. You want to be a little bit directional.

It’s okay to use these a little bit directional. But if you can be directional and give yourself a little bit of an edge, meaning that your breakeven point is just slightly below where the market is, then that allows you to profit from the stock staying right where it is now, not moving, or going down just a little bit. And that's what we wanted to do on these, and both of these were pretty good trades, and we kept them small.

The other trade that we got into tonight was a vertical call spread in GLD. Now this one, we just played a little bit bearish because GLD, the technical’s were still pointing bearish, and it hasn't made a pretty significant bottom yet. We could’ve done an iron condor, but we’ve got so many iron condors right now that we just didn't need to. We can leg into an iron condor and this one if we want to, later on, but we’re going to play it a little bit directionally bearish.

We went ahead and did the 121/123 credit call spread in GLD for a $.31 credit. We did decide to place that first short strike for GLD. And as soon as this pulls up here, you can see where our first short strike is. Let me just actually open up how many strikes we have. Perfect! We did decide to place that first short strike at the 20% probability of being on the money level. You can see that first short strike that we have here at 121 has about a 20% to 21% chance that it's in the money at expiration, meaning that we lose on this trade.

If we flip those probabilities around, that means that we’ve got about an 80% chance that we win on this trade. Even though we don’t take a enormous credit and it was only two contracts that we’ve sold, it’s got a very high probability of success. And if you see the chart of GLD, you can see that implied volatility remains very high in gold. And we did a good job trading gold last month. With IV up in the 55th percentile, it's still a very, very good trading setup. And hopefully, we get a continued move either down or sideways in gold, but more so than that, we’d like to see implied volatility drop.

Alright, no closing trades today, but we did have one adjustment to our Amazon iron condor. When we initially entered this iron condor, I believe it was actually not last week, but the week before that we joined the iron condor in Amazon, now we've seen Amazon rally higher with the general market which is fine, and it triggered us to go ahead and make an adjustment to this trade because our short strike on the call side now became a 30 Delta.

We initially entered it, and it was a 15 Delta or a 15% chance of hitting on that side of the trade. And as the market has rallied higher, Amazon has now cost that that call option above the market, that short strike is now at about a 30 Delta. That automatically triggered us to make one of our mechanical adjustments to this position. Here's a look at where our position is now on Amazon as far as the strikes.

Here's our call spread above the market and you can see Amazon backed off towards the end of the day, but it did go up, and it did reach about a 30 Delta. It’s now back down to about a 23, and that's okay, that’s no big deal. But it has rallied up towards our short call up at 325, so we went ahead and added that another side to the trade and here's what the risk profile looks like currently for Amazon. Let me narrow this out.

And you can see that by adding this additional put spread, we get almost this two stair step type iron condor. And what I like about this trade though is that even though Amazon backed off towards the end of the day, by making this adjustment, our trade is much more centered over Amazon now than it was before, meaning the stock is trading more carefully towards the heart of our profit window which is right in here.

This is the area that we can make money in, right in here. And the stock is trading much closer towards the middle point of that area, and that’s ideally what we want. Now with about 15 days to go until expiration, there’s not much wiggle room that we want to do besides this adjustment, so we’ll probably leave this one alone here and let it ride mostly through expiration.

But if I take off this adjustment and show you guys what looked like before… And let me go ahead and get off the 290/285. This is what the iron condor looked like before. You can see it’s much more heavily tilted towards this side of the trade. You still have a wide profit window down here, but what’s the likelihood that Amazon now goes all the way down here?

We’ve gone through about a week and a half of trading, so we want to obviously acknowledge the new move that Amazon has made up. By adding this trade, this is what the new profit and loss diagram looks like. It just consolidates everything into this smaller window but recognizes that Amazon has moved higher and we’ve got a new trading range that we might be in. I like this adjustment. We might end up rolling off the other put spread that we have here.

But overall, this would reduce our risk. It increased our potential credit or profit in the trade, so we like it as an adding trade and additional trade to the strategy, but we’ll consider possibly rolling off the lower 265/260 put spread later. Right now, I don't think that it’s trading for too much money at all, so I believe that right now we’re probably okay just holding onto it and letting it just decay and become worthless as we get closer and closer towards expiration.

As always, I hope you guys enjoy these videos. If you have any comments or questions, please add them right below in the comment box on this page for the trading alerts. And if you're watching this video somewhere else out there online or on YouTube, you just have to understand that these videos and trading alerts go out to our members live, but they are shown to you publically about 15 to 20 days after they're sent out to our members.

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About The Author

Kirk Du Plessis

Kirk founded Option Alpha in early 2007 and currently serves as the Head Trader. In 2018, Option Alpha hit the Inc. 500 list at #215 as one of the fastest growing private companies in the US. Formerly an Investment Banker in the Mergers and Acquisitions Group for Deutsche Bank in New York and REIT Analyst for BB&T Capital Markets in Washington D.C., he's a Full-time Options Trader and Real Estate Investor. He's been interviewed on dozens of investing websites/podcasts and he's been seen in Barron’s Magazine, SmartMoney, and various other financial publications. Kirk currently lives in Pennsylvania (USA) with his beautiful wife and three children.