1. Try clicking on the name of the most recent article in the column on the right. This will remove the "Archives" list.
2. Try right click on the chart itself and open it on a separate window.
I am sorry that I cannot always make the chart small enough to fit neatly on the left column. I want you to be able to see the details I want to point out.
I Hope this helps,
Juan
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The only reason I would play a Calendar spread would be because of a short-term volatility skew between front and back month. To make my case, I went back 2 months and ran the Skew finder and found King Pharmaceuticals (KG). Sell front month options and Buy second month options (as long as they have low IV) either PUTS or CALLS. It would not be out of the question to find a skew in the either side, so one would make sure that the larger skew is selected (either calls or puts). The uninitiated would follow the recommendation of buying long-term options in the hope of collecting premium month after month after month. This is not my preference because the possibility of a jump in either direction increases with time.
Take a look at this example on KG:
October calls are low in IV (34%), compared to the 51% IV in May options with a premium of almost $1 with only 11 days to go. The differential in IV is dramatic. One of two outcome are likely: The short-term IV decreases, or Theta consumes most of the premium, or the IV of the long-term options catch up with the IV of the long-term options and the value of our longs increase. Of course a combination of all this items would produce the better result:
One day before expiration and with a $150 profit, the IV of the short options has declined to 0%, as the options return to the strike price.
Following the proposed strategy of collecting premium month after month, after month, I do a rollover to the next month by closing my current May calls and sell June calls. This way I reduce my debit to $800 from $1150, while increasing my profit to risk ratio to 72%.:
Eventually, however, as it is often the case, the stock price falls out of range, wiping out my profits. FURTHER, we have already trade 40 contracts, which transform my trade in a loss.
As pure volatility play, we want to sell front month option. The longs are merely a protective position. Thus, it make little sense to go beyond second month options. Thus, I propose to sell front month with only 11 days to go, and buy second month options to be sold after the front month expire. I believe that you could probably do well in your entry with a limit order that is slightly off the middle between bid and ask, depending on the liquidity of options at play. The October options are probably NOT the most liquid so a good entry price may be more difficult to achieve, The June options may be more readily traded. For the purpose of this demostration, I have entered the market price at closing. The drawback of this strategy is the commissions. A mere $1200 position probably takes a lot of money in commissions, which will cut deeply into our profits. I hope that the short would expire worthless and thus I would not have to pay commissions to buy back the shorts.
On expiration, the underlying closes at the strike price which means that I have collected the whole $0.95 in premium, but...
... on monday after expiration I will be short 4000 shares of the stock at the opening. No matter, at the monday opening one closes both the longs and the shorts. The trade yields $500 profit, just above 40%.
My problem is that even with the limited duration of this trade, I have spend far too much money in commissions. I limit my risk of a jump above or below my breakeven points by selecting a stock trading below $20, but the number of contracts to trade a mere $1200 and make a mere $500 is way too high, thus commissions do not warrant this approach. In the end the profits are meager and the risk is high, as we have seen with the original trade, by the end of the second month, the stock had moved out of range.
If you are a calendar fan, please comment here if you would have followed a different approach. Thanks in advance.
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