Weekly Calendar Spread in GLD
Weekly options calendar
Weekly calendar spread: Yesterday I added a GLD trade to the OptionGenius.com portfolio and I mentioned that GLD might be a good candidate for a Calendar Spread. Several members emailed me asking to explain how to set up the option trade and the parameters so I decided to just post it on the blog. I tried making a video but I am a total non techie and screwed up the video. I got it uploaded to Youtube but everything on the screen is so small you cannot see what I am doing.
Anyway, here are some screenshots of the trade.
GLD Calendar Spread
Breakevens
Calendar spreads
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 option trade was put on today before the FED announcement and since then GLD has moved up about $1.
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Allen, I am confused. I thought you only recommended options to sell, not options to buy. But in this calendar spread, you are recommending a debit spread, aren’t you? The Nov 125 call must cost more than the Oct 125 call, so it is a net debit, right? Thus, you are recommending a buy to open spread, and not a sell to open spread.
This seems to be a significant diversion from your “option genius philosphy.” Or am I missing something?
Steve
Great catch Steve.
Yes the Calendar is a debit spread but it is a theta positive spread. So it qualifies as an income trade and not a speculative trade. In this case we are selling the fron month option and will exit the trade once it has lost enough value. I would not want to let it expire and then keep the long option. Although that is a strategy that can work as well.
So for example, if you think GLd will continue to go up you can buy a long term option several months away. the Sept 2011 options would work. You buy the at the money option and then sell the same strike in the Oct 2010 expiration month. You then roll the sold option to Nov, then Dec, then Jan etc. and if GLD continues to increase you roll the sold option to a higher strike.
This way the long option increases in value as GLD goes up and you earn theta as you sell shopt options month after month to pay for the long option. You get the best of both worlds. Unless of course GLD drops in price.
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Can’t you do this with both a calendar spread at the money with both PUTS and CALLS?
A calendar can be done with either puts or call, but not both.