Option Calendar Spread Update 10/5/2010

Calendar spread strategy update

Option Calendar Spread Update: Oh oh, GLD jumped up today along with the rest of the market. You’d think that if the stock market goes up because the economy is getting better than Gold would go down. Nope. So I guess the economy is not the reason the market is up today – contrary to what the news tells us.

As long as the dollar gets weaker, the markets and GLD will both go up.

But there was an interesting post on another blog Slope of Hope that showed graphically that Gold might be heading towards a retracement. Check it out if you are a Gold Bug.

OK, back to business. The up move today took GLD outside of our upside option Calendar break even.

Here’s what it looks like right now.

Calendar Option Spread

So what do we do? I don’t want to add more capital to this, even though that is an option.

Step 1. Take off the spread hurting us the most. Take off the 125 Calendar.

Step 2. Now that we are in a better position it is time to determine how to adjust. Easiest way: just add another calendar at a higher strike. We have two options: adding the 131 or the 132.

Here’s the chart when we add 131 call calendars to the 128s we already have:

Double Calendar GLD Spread

Double Calendar 128/131 Call GLD Spread

In the middle of the graph we can still make about $450.

Here is the graph of the 128/132 Calendar:

132 Double Calendar

128/132 Double Calendar

The amount we can make on the 132 is lower: closer to $100 but the upside break even is farther away. The 133 Calendar is too far away and the profit at the middle of the graph becomes negative so that is not an option.

Which to choose? Depends on what you think GLD will do in the next week. I normally like to be out of Calendars the Monday or Tuesday before expiration (next week).

Option calendar spreads

If you think GLD will stay put or move down a little, the 131 makes sense. Otherwise the 132 is the best way to save this trade. If we do the 132, and GLD keeps moving up and gets to the break even we will be down about $670 which is around 17%. Right now we are down $450

But hold on! There is another option.

What if we take off the 128 as well and re-position the trade?

Here’s a graph of a 130 – 133 Double Call Calendar. I sold the 125 and the 128.

Calendar spread

Double Call Calendar 130-133

I think I like this one best of all: Break evens are 129.39 and 133.77 with the ability to make $400  in the middle of the graph.

Options calendar spread recap

Recap: GLD is outside the break even on our 125/128 Oct/Nov Call Calendars. I don’t think GLD will come back into our trade. I think it will stay outside the break evens and so I need to adjust.I am adjusting by selling both the 125 and the 128 Call Calendars for a credit. I entered the trade with a debit. And then I am repositioning the trade by buying the 130 and 133 Oct/Nov Call Calendars. I now have new break evens and the ability to make a decent return.

7 Comments

  1. audreyf on October 7, 2010 at 10:05 am

    Thanks Allen. I am watching it now and it is going down. Finally I am learning a little. If it continues to go down I will keep the 128. If not I will buy the 130/133.

  2. audreyf on October 7, 2010 at 4:24 pm

    Allen, with help from tos I realized that this was a double calendar, which amounted to 4 contracts x 2 each =8.
    Now that I know that. I did sell the 128 as you suggested. am I looking for expiration date of oct to reach between 130 and 133? Thanks for all your help.

    • Genius on October 8, 2010 at 9:40 am

      USe TOS to model the trade and determine your breakevens. You want GLD to stay between those. also look at the Theta of the trade. That is how much the trade will make per day if there is no movement.

  3. audreyf on October 9, 2010 at 6:32 pm

    When you say no movement, do you mean none even in pennies or only in dollars?

    • Genius on October 21, 2010 at 2:15 pm

      No movement means it stays pretty close. It can move a little. The amount varies by stock. You dont want to have the stock move by several standard deviations. A stock like apple might not be a good one for regular calendars. Earnings calendars are a different story.

  4. Hugh on October 12, 2010 at 8:46 pm

    Allen,

    Thanks for the info to slopeofhope. It’s proved to be another great of source of information.
    Of course, this link then led to ETF watch, also with some very good info on GLD. Is it topping. Sure looks like it.
    THEN, I also checked out the Elliott Wave sight as well. Will it ever end?
    The question now, is, are there any sites you tend to find yourself gravitating to more than others, such as Elliott Wave?

    • Genius on October 21, 2010 at 2:20 pm

      There are a lot of great sites out there. For every one that says a stock is going up, there is another that says down. Eventually you get information overload.

      Something else that I have seen happen to traders andmyself as well, is that they tend to read and keep going to the sites that have a similar mentality to themselves. So if a trader thinks gold is going higher, he tends to stick to sites that talk about gold going higher and stays away from those that say that gold is going lower.

      I myself, am going on an info diet. less financial news. less reading online. More focusing on the market itself and what it is telling me and less guessing what is going to happen tomorrow based on what reports are going to be issued or who is speaking where, etc.

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