***Closed***SPY (Standard & Poors Dep Rec) Calendar Spread initiated on 20 May 2009 (Bonus Trade)
18 June 2009: Close Calendar Spread
SPY (Standard & Poors Dep Rec) Calendar Spread initiated on 20 May 2009
Trade Type: Bonus Trade
Trade Summary
18 Jun 2009
SPY at 92.53 (+0.99)
0 days to Jun expiration
Action: Sell to close the calendar initiated on 20 May 2009.
Sell to close SPY July 89 Put
Buy to close SPY June 89 Put
For a net price of $1.57-1.58 credit or better. [All TOS auto-trade participants were filled at $1.59.]
Profit or loss: +$49 per entry
Analysis
This calendar worked out pretty well. We initiated this calendar spread to take advantage of the low implied volatility. We entered this trade for $1.10 debit and sold it back for $1.59 credit. This trade made a profit of $49 per entry, which is about 44.55% returns!
We will continue to be on a lookout for such bonus trades to supplement our regular iron condors to generate even better returns every month!
Good trading,
Gary
*****Trade History*****
20 May 2009: Initiate New Calendar Spread
SPY (Standard & Poors Dep Rec) Calendar Spread initiated on 20 May 2009
Trade Type: Bonus Trade
Trade Summary
20 May 2009
SPY at 91.46 (+0.34)
30 days to Jun expiration
Action: Buy a calendar spread for June expiration.
Buy to open SPY July 89 Put
Sell to open SPY June 89 Put
For a net price of $1.08-1.10 debit or better.
Net margin required: $108-110 per entry
Analysis
This is our first trade for June and it is not a market neutral one. To a certain extent this calendar spread is a mildly bearish position. More importantly, it is a positive vega position.
This trade is initiated to take advantage of the low VIX (implied volatility). VIX is the so-called fear index and its decline in the past few weeks indicated that there is very little fear in the market lately. To borrow from Warren Buffet, when people are fearful we should be greedy, when people are greedy, we should be fearful. The VIX tells us that there is complacency in the market. This calendar spread takes advantage of this complacency.
Again, we’re not sure how the market will move in the coming days. If the market goes higher and higher and the fear diminishes then this trade will be a loser. So this trade is directional and not neutral. However, as long as the VIX rises regardless of how the SPY actually moves, this trade could become a winner since we’re long vega.
For those of you who are new to calendar spread or time spread, let me have a quick run-through of how we aim to make money with this trade. The premise of a calendar spread is to sell the front month and buy the back month at the same strike. In our case, we sold the June 89 Put and bought the July 89 Put. The trade makes money because the short option (Jun 89 Put) decays faster than the long option (Jul 89 Put). Nearing expiration, the short option (Jun 89 Put) will be worth less than the long (Jul 89 Put). We will then close the trade by buying back our short option (Jun 89 Put) and selling our long (Jul 89 Put). We will be able to make a profit if the SPY is trading near 89 when we close because the Jul 89 Put will be worth more than the Jun 89 Put.
Of course, this is a very simplified explanation of a calendar spread. There are as usual a host of other variables that will decide a winning calendar and a losing calendar. One of the most important factors is the implied volatility. It is not possible to determine the maximum profit since the value is dependent on the IV at that time.
SPY calendar spread
The most we can lose is $1.10 per trade. But we’ll cut our losses if we lose more than 50%.
We’ll keep a close look at this trade and inform you accordingly when the time comes to close.
Good trading,
Gary
