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Adjusting Calendar Spreads

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Adjusting Calendar Spreads Module 6.6 Adjusting Calendar Spreads Adjusting Calendar Spreads This class is a production of Safe Option Strategies © and the content is protected by copyright. Any reproduction or redistribution of this or any Safe Option Strategies © presentation is strictly prohibited by law. The information presented in this class is for education purposes only. Safe Option Strategies © does not make any recommendation to buy or sell stocks or options. Trading stocks and options comes with risk and you are solely responsible for any losses you may incur as a result of trading. Module 6.6 Adjusting Calendar Spreads Review of The Calendar Spread Debit Spread Buy to Open the Trade Long Call or Long Put is Placed Close to the Money (just in or just out) and Typically 45-90 Days or Farther to Expiration. This is our Primary or Money Making Option. Short Call or Short Put is Placed in an Earlier Month of Expiration at Any Strike Price (same, higher, lower). Cost Basis or Net Debit of the Trade is the Debit of the Long Option Minus the Credit of the Short Option Max Risk = Cost Basis Max Reward = Is Different in the Case of the Short Option Being Higher, the Same, or Lower than the Long Option. Good Target ROI is 20-30% Good Target Time in the Trade is Under 6 weeks. Module 6.6 Adjusting Calendar Spreads Adjustment for Wrong Direction Open the Trade Expecting Steady Directional Movement Stock price moves in the wrong direction. We roll our short option to follow the direction of the stock. LP Roll out to the shortest expiration we can while still SP taking in more credit on the new short option than what we spent to close the old one. Repeat with rolled, or new short options. Module 6.6 Adjusting Calendar Spreads SP SP LP Module 6.6 Adjusting Calendar Spreads SC SC LC Module 6.6 Adjusting Calendar Spreads SC SC LC SC SC SC Module 6.6 Adjusting Calendar Spreads Original Trade is a Call Calendar on CAT Buy to Open Jan14 $90.00 Strike Calls - $3.75 Debit Sell to Open Nov13 $90.00 Strike Calls - $1.80 Credit Total Debit to start the trade - $1.95 Expectation is for a slow steady bullish trend. Stock reverses and goes bearish. Roll November shorts calls out, and down to NovWk4 $88.00 strike calls. Buy to close the Nov13 $90 - $0.81 debit (this is added to our cost basis) Sell to open the NovWk4 $88 - $1.72 credit (this is now subtracted from our cost basis) New cost basis for our trade is $1.04 Original cost basis $1.95 Debit for Closing Short Option +0.81 Credit for Opening Short Option -1.72 New Cost Basis $1.04 Module 6.6 Adjusting Calendar Spreads Same Trade with new cost basis of $1.04 is now a Bear Call Calendar Stock Levels Out Allow NovWk1 $88 Strike Short Calls to Expire Worthless Remember, we have already counted the credit from this toward our cost basis Sell to open the DecWk1 $88 - $0.65 credit (this is now subtracted from our cost basis) New cost basis for our trade is $.39 Adjusted cost basis $1.04 Credit for Opening Short Option -0.65 New Cost Basis $0.39 This is probably a good time to set up a limit credit order to close the trade. If you do this, you still want to add in the original sought after ROI. (.39 + .49 = $0.88) Module 6.6 Adjusting Calendar Spreads Summary 1. When a calendar spread moves the wrong direction we can: 1. Roll our short option to follow the direction of the stock movement 2. Short addition options (calls or puts depending on your long option) at the OTM strike closest to the price of the stock and repeat this each time they expire worthless. 2. As you move your position, keep track of your cost basis and apply the next short option credit to the adjusted cost basis. 3. Set up a new target exit and adjustment strategy and remember to base your sought after profit on your original cost basis if you still want the full profit in the trade..
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