The first is  simple one, a credit spread, and the second is a Calendar.

At first I only wanted to talk about the calendar, but as I started making the video I showed the credit spread as well.

This video starts by me updating the 2 credit spreads I showed to members last month. I then show the new credit spread trade I put on. And then I get into the calendar.

I discuss, the trade, a possible adjustment, why I chose the strike I did, and what I think the stock will do.

If an adjustment or an update is needed I will post it in the members’ area of the site.

Enjoy!

Click here to view the embedded video.

2 More Fresh Trades is a post from Option Selling.
To learn how you too can earn 8-12% Monthly Returns Safely and Conservatively check out OptionGenius.com

http://optiongenius.com/blog/mcd-butterfly/

One reader posted an excellent comment that I decided to create a new post about. Here is what he asked:

As of Friday’s close, the 75 fly would cost $3.15 for a BE range of 73.16 76.86. Max profit at the 75 strike (if held to exp day)is approx $180 for a 57% ROI.

With a April/May 75 Calender Call Spread, (with a +1 IV skew),the cost is .83 for a similar BE range: 73.4576.46. Max profit at 75 strike is only $62 (compared to $180 for 75 fly), but the ROI is 75% (compared to 57% ROI for fly).

So here’s the $64 question: given these two ‘range-bound’ option strategies that offers nearly identical BE profit ranges, would it not make ‘more’ sense to go for the 75 Cal, given it’s purported superior Risk/Reward profile, in addition to savings on comm (2 leg vs 4 leg spread)?
Plz enlighten me – esp. on how decrease in IV affects Calender spreads.

Thanx

Great question. I am not going to check his math because for the answer it does not matter. But in his analysis he feels that the Calendar spread on MCD would be a better trade than the butterfly spread I put on.

There are several ways to answer this so I am just going to ramble on.

First, the max ROI is not really important because I am not going to stick around for the max roi. I want to make my 15-20% and get out. It is virtually impossible to nail the max roi on one of these especially as crazy as the greeks get closer to expiration.

Second, since the breakeven range is about the same, you really can do either trade. So one is not better than the other. What makes the difference is how the options will behave – or how you think they will behave.

Third, my opinion was that prices will move up. When stock prices move up, option volatility goes down. When option volatility goes down, option premium goes down as well. So with the butterfly, the at the money option, (which we sold) will lose value the fastest if volatility comes down. And thus the butterfly spread could be making money very quickly if there is a strong move higher.

The butterfly makes money when volatility goes down. The calendar makes money when volatility rises, especially in the back (long) month.

So in this case, we have a Calendar with the short option in April, and the long option in May. MCD also has earnings on 4/21 which is in the May cycle. So May options will retain their premium because the implied volatility of the May options will remain stable until after earnings when they will drop. So a Calendar spread would work here as well.

BUT, the calendar loses money if volatility drops fast because the value of the long option drops as well. In this case, this might not happen because of earnings. Normally, you want to put on a calendar when you think volatility is at a low point and will increase. Calendars make money quickly whenever volatility jumps.

I hope I earned the $64.

I chose the butterfly because I think MCD will go higher into quarter end and into earnings. and so the butterfly gives me a better chance to make my money faster and exit quicker than the calendar. Of course I could be wrong and MCD could go the other way. In that case the Calendar would have been better. But both are doable in this situation.

Why Trade a Butterfly Over A Calendar? is a post from Option Selling.
To learn how you too can earn 8-12% Monthly Returns Safely and Conservatively check out OptionGenius.com

Anyway, here are some screenshots of the trade.

GLD Calendar Spread

Breakevens

The trade was to Sell the Oct 125 Calls and Buy the Nov 125 Calls. That sets up a simple calendar. You can use puts or calls, they are interchangeable but the puts are usually cheaper. The plan is to adjust when GLD hits a breakeven. The simplest adjustment is to just add another Calendar Spread at the money. This will double your capital in the trade but will give GLD more room to run around.

This trade was put on today before the FED announcement and since then GLD has moved up about $1.

Weekly Calendar in GLD is a post from Option Selling.
To learn how you too can earn 8-12% Monthly Returns Safely and Conservatively check out OptionGenius.com

Buy Dec 590 Call, Sell Nov 590 Calls for a debit of 10.65 per spread.

If you do just one contract, it will cost you $1065 plus commissions. If RUT does not move much by Monday you should have over a 10% gain. Even if it moves about 8 points either way, you should still have close to a 10% gain.

This is a great trade to papertrade.

RUt Calendar Spread Graph

Free Trade: RUT Calendar Spread is a post from Option Selling.
To learn how you too can earn 8-12% Monthly Returns Safely and Conservatively check out OptionGenius.com

In that trade we sold the Oct 90 Calls and Bought the Nov 90 Calls.

The trade makes money when POT stays in range around 90. Basically what we want is the Oct option to decay and lose value while the Nov option (which we bought) retains its value. Time Decay quickly erodes an option’s value, especially in the last 30 days. That is why I prefer to put these types of trades on with 30 or fewer days left for the front month.

We enter this trade with a debit meaning we paid for the trade. That is because the Nov option was more expensive than the Oct option because the Nov option has more time premium.  POT also has earnings after the Oct option expires which means that the volatility (value) of the Nov option will be elevated (at least a little more than normal).

What we want is for POT to stay in between the break evens until it gets close to expiration. The Oct option loses value everyday and that is how we make money. During the last few days before expiration the fluctuations in prices can move wildly.  That is why I prefer to be out of this trade before expiration week. But in this trade we put it on pretty late and will have to stay in longer.

To exit a Calendar Spread you have to sell it. Otherwise you will still be holding the back month (Nov) option even if the front month (Oct) expires.

The beauty of Calendar Spreads is that they are cheap to trade, easy to adjust, and can result in large profits – 20-40% is common. You can also keep your losses small.

The Calendar Spread is a post from Option Selling.
To learn how you too can earn 8-12% Monthly Returns Safely and Conservatively check out OptionGenius.com

was channeling and that it would be a good set up for an income strategy.

The only problem was that earnings are after expiration which is in 10 days.

Earnings could move the stock but it also keeps the volatility of the options

high and that means high premium.  There is also a dividend to be paid on the 15th, which is one day before expiration. A dididend will lower the price of the stock by the amount of the dividend which in this case is 10 cents.

His idea was a butterfly. I decided to do a calendar because it is easier to adjust and share it here.

Buy 1 Nov 90 Call and Sell 1 Oct 90 Call. This trade cost me $315. My breakevens are at 86.14 and 94.40.

I feel this trade will work. But it will have to be held close to expiration. 

If POT gets outside the breakevens, exit the trade. or if you are experienced enough, add another calendar on the side of the brreakout.  If POT stays around 90, stay in as long as you can.

Free trade: October 07, 2009 is a post from Option Selling.
To learn how you too can earn 8-12% Monthly Returns Safely and Conservatively check out OptionGenius.com