After we imagine the stock price will explode or crash soon, we are able to trade a Calendar Spread options technique to maximise profits in times of high volatility. Though Calendar Spreads have huge leverage, it’s a difficult trade to master as we should be correct in each the direction and size of the trends to profit.
Today, we share a number of several types of Calendar Spreads and the way to find one of the best entry points.
What Is a Calendar Spread Options Strategy?
A Calendar Spread is a mix of long and short options at the identical strike price but with different expiration dates. The trade uses the differences in theta to create a high-leverage trade. We are able to arrange several types of Calendar Spreads based on different directional expectations, and take advantage of big volatility in the longer term.
If we imagine ROKU will rise by $20 from the present market price of $72, we are able to trade a Calendar Spread at $90:
- Buy a $90 Call option that expires in 2 months.
- Sell a $90 Call option that expires next month.
ROKU bullish Calendar Spread setup.
This Call Calendar Spread costs $249 in buying power.
TD Ameritrade might help us analyse the profitability of this Calendar Spread. If ROKU rises to $90 before the short Call expires next month, the Calendar Spread value will increase to $516, making a profit of 107%.
Maximum profit when ROKU rises to $90.
If we imagine PYPL’s stock price may fall from $97 to $75 very soon, we are able to trade a bearish Calendar Spread at $75:
- Buy a $75 Put option that expires in 2 months.
- Sell a $75 Put option that expires next month.
PYPL bearish Calendar Spread setup.
This Put Calendar Spread costs $113 in buying power.
The profit evaluation from TD Ameritrade shows if PYPL falls to $75 before the short Put expires next month, the Calendar Spread options value will increase to $389, making a profit of 244%.
Maximum profit when PYPL falls to $75.
Key Points to Trading Calendar Spreads
A Calendar Spread uses the various option expiration dates to create a difference in theta to extend our leverage.
Theta is the changes to options value with respect to changes in time.
By comparing different theta decays of 60 and 30 DTE options, the theta decay is slower the further away from expiration.
The greater the theta decay the closer to expiration.
So the theta decay of the long option is slower than the short option in a Calendar Spread. The closer the stock price moves towards our strike price, the greater the difference between theta, resulting in greater profits.
Vega is the changes to options value with respect to changes in IV.
A low IV results in a lower options value, while a high IV results in a better options value. So we buy to open a Calendar Spread at low IV, then sell to shut when the IV rises.
Easy methods to Find Bullish Calendar Spread Entry Points?
The Bull Put Spread Screener uses fundamental evaluation to seek out the Fair Values of stocks. It also uses technical evaluation in Long Days to seek out the timing of bullish trends. We are able to sort the list by Upside to seek out heavily undervalued stocks with the best upward potential.
Use the Bull Put Spread Screener to seek out bullish stocks.
The BABA stock has the best Upside of 102%, and shows a bullish trend that began 14 trading days ago, indicated by the Long Days signal. So we may be confident of a bullish outlook for Alibaba.
We wish to seek out a Calendar Spread strike price that BABA can reach, so we take a midpoint between the present price and the Fair Value to set because the strike price:
- Buy a $135 Call that expires in 2 months.
- Sell a $135 Call that expires next month.
BABA bullish Calendar Spread setup.
This Calendar Spread costs $39 in buying power.
If BABA rises to $135 inside a month, the choice’s value will rise to $830 for a profit of two,028%.
Maximum profit when BABA rises to $135.
Easy methods to Find Bearish Calendar Spread Entry Points?
The Bear Call Spread Screener uses fundamental evaluation to seek out the Fair Values of stocks. It also uses technical evaluation in Short Days to seek out the timing of bearish trends. We are able to sort the list by Upside to seek out heavily overvalued stocks with the best downward potential.
Use the Bear Call Spread Screener to seek out bearish stocks.
The ENPH stock has the bottom Upside of -54%, and shows a bearish trend that began a trading day ago, indicated by the Short Days signal. So we may be confident of a bearish outlook for Enphase.
We wish to seek out a Calendar Spread strike price that ENPH can realistically reach, so we take a midpoint between the present price and the Fair Value to set because the strike price:
- Buy a $230 Put that expires in 2 months.
- Sell a $230 Put that expires next month.
ENPH bearish Calendar Spread setup.
This Calendar Spread costs $515 in buying power.
If ENPH drops to $230 inside a month, the choice’s value will rise to $1511 for a profit of 193%.
Maximum profit when ENPH falls to $230.
Now you recognize the way to use the bullish screener and bearish screener to seek out good Calendar Spread opportunities, and take advantage of big volatility.