Hello Friends. My name is Michael Gonsalves. I have enjoyed reasonable success with Options strategies. I made Rs. 2.5 Cr in FY 2019-20 and Rs. 1.65 Cr till date in FY 2020-21 (see proof). I am eager to learn more and also to impart my learnings to others. If you have any queries, please ask. I will answer soon.

Calendar Spreads: What they are and how to adjust them

Started by Michael Gonsalves, Sep 05, 2021, 02:48 PM

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Michael Gonsalves

I found a very nice pdf file from "Safe Option Strategies" explaining what calendar spreads are and what adjustments to carry out to increase the profit potential. Practical examples have been given which makes it easier to understand and implement.

The link to download these pdf files is given below:

Calendar Spreads Defined

- Debit Spread
- Buy to Open the Trade
- Long Call or Long Put is Placed Close to the Money (just in or just out) and Typically 45-90 Days or Farther to Expiration. This is our Primary or Money Making Option.
- Short Call or Short Put is Placed in an Earlier Month of Expiration at Any Strike Price (same, higher, lower).
- Cost Basis or Net Debit of the Trade is the Debit of the Long Option Minus the Credit of the Short Option
- Max Risk = Cost Basis
- Max Reward = Is Different in the Case of the Short Option Being Higher, the Same, or Lower than the Long Option.
- Good Target ROI is 20-30%
- Good Target Time in the Trade is Under 6 weeks.

Calculating Risk to Reward Ratio

1.Max Risk = The net debit of both options (the debit of the long call minus the credit of the short call) if the price of the stock falls and both options expire worthless.

2.Max Risk = The net debit minus the difference in strike prices if the stock moves high enough for us to get called out.

3.Target ROI = The price of the short option divided by the price of the long option.

Adjusting Calendar Spreads

- Open the Trade Expecting Steady Directional Movement
- Stock price moves in the wrong direction.
- We roll our short option to follow the direction of the stock.
- Roll out to the shortest expiration we can while still taking in more credit on the new short option than what we spent to close the old one.
- Repeat with rolled, or new short options.

Summary

1.When a calendar spread moves the wrong direction we can:

a.Roll our short option to follow the direction of the stock movement

b.Short addition options (calls or puts depending on your long option) at the OTM strike closest to the price of the stock and repeat this each time they expire worthless.

2.As you move your position, keep track of your cost basis and apply the next short option credit to the adjusted cost basis.

3.Set up a new target exit and adjustment strategy and remember to base your sought after profit on your original cost basis if you still want the full profit in the trade.