How You Can Harness the Power of Weekly Calendar Strategies

options trading affords traders the opportunity to make money in the market over wide ranges of prices either up or down you don't need to be able to predict which way the market's heading you just need to know how to construct trades that can win over ranges of prices up or down around the current market price i'm seth freudberg the head trader of smb capitals options trading desk here in manhattan and the traders on our options trading desk are experts in structuring options trades to win in ranges in this video we're going to teach you how to make money through a strategy known as the calendar spread which allows you to make money over a range of prices and also how to expand that range if the market moves out of the current pricing range so if that sounds intriguing to you then stick around because i think you're going to find this interesting hi i'm seth freudberg and i'm the head trader of smb capitals options trading desk smb capital is a proprietary trading firm located in midtown manhattan and we provide capital for options and equity traders from all over the world trading both remotely and in our offices here in new york city now i'd like to suggest that you click on our subscribe button right now so that you don't miss any of our free trading videos that we produce for traders and investors all over the world they're really very valuable okay so last year the spx index which represents the s p 500 basket of large cap stocks after initially bouncing sharply off the pandemic lows of 2020 then that bounce finally stalled in september and resumed a more steady grinding rally since mid-november through to this week the grinding rally has periods where it bounces and then rests as you can see and so there's certain option strategies employed by traders who utilize our desks trading style for conditions like the one that we're in right now unlike other forms of trading options income trading allows a trader to not only win over a wide range of prices above and below where the market currently is but it also allows for that range to be extended if the market runs outside of the range allowing for winning trades under those circumstances also so one of the most popular strategies to implement under these circumstances is known as a calendar spread to options traders now before we explain how a calendar spread works i wanted to do a really quick review of how index options work as we'll be illustrating this strategy using index options if you know about index options this will be really quick so just hang in there okay so think of an index option as a bet what are known as call options pay off if an index closes above what's known as the strike price of the option on the day that the option expires if the index does close above that price on expiration day then the call buyer gets 100 per point that the market closes above that calls strike price a put option is the exact opposite it pays off if the market closes below the strike price of the put option again 100 per point that the market closes below the strike price of the put so for example if an index closes at 40 32 then the 4 000 call would pay 3 200 as you can see from the calculation because the index closed 32 points above the strike price of the call which is 4 000. however the 40 75 call would expire worthless as the index didn't close above 40-75 so the called seller just pockets the premium and the puts are just the opposite if the market closed at 40-32 then the 40-75 put would be worth 4 300 because the market closed 43 points below that put strike price of 40.75 but the 4 000 puts they'd expire worthless because the market didn't close below the 4 000 strike price okay so now with that as background let's set up a short-term one-week calendar spread trade going back to february 18th and since the spx index is trading at 39.13 we'll assume that the market will stay in that general vicinity for the next week and sell 10 of the 3915 calls expiring a week later and buying 10 of the 3915 calls at the exact same strike price but this time 12 days out so this combination of short calls at one strike and long calls at the same strike but in a later expiration chain is known as a call calendar spread now before we move on to explain how this trade works and why i wanted to let you know that if you want to learn three option strategies that our pro traders use including the unique options trick that allows you to make money while you wait to buy stocks or etfs at the price you want the options income strategy that allows you to make consistent money whether the market goes up down or sideways and how to make money on a stock or index trade even if you're out right wrong on the direction then click the link that should be appearing now at the top right corner of your screen that will open the free workshop registration page in a new window so don't worry you won't lose this video or you can register directly for free at optionsclass.com believe me you don't want to miss this so pause this video sign up now and then resume watching okay so now getting back to our calendar spread trade let's first discuss why it works well the basic concept of a calendar spread is most easily understood if you think about the case where the market would close exactly at 39.15 a week later if that were the case then the short calls would have no value as we explained earlier because the market needs to close above 39.15 for it to have any value but those other long call options will still be alive for five more days so those options will have plenty of value in them if the market's at 39.15 because the seller of those options has to have enough price in them to absorb the cost of paying off on them if that market has a big rally over those five days where those long calls are still alive while the short calls have expired and so that would be the perfect calendar trade i say perfect because at any price above 39.15 the short cause would have to pay off as we explained earlier offset by the fact that the long calls will be a little more valuable at those higher prices and at lower prices while the short calls would expire worthless which is a good thing because we're short those the fact that the market is lower and of course the time has passed will reduce the value of those long calls a decent amount and so graphically the calendar spread trade looks like this and as you can see as we just said at 39.15 the short call expires worthless but the long call has plenty of value and so that's the optimal point for the spx to close on february 24th when the short call expires and as you can see from that illustration at any point above or below 39.15 less profits available as we just explained and if the market moves too far from 39.15 namely 39.57 on the upside or 38.73 on the downside as you can see the trade will begin to actually lose money as on the upside because the short call's just too costly compared to the value of the long call or to the downside the depreciation of the long call is just too costly and the trade begins to lose money and so a common technique that traders use is to modify the trade to widen that zone of profit if the market gets close to either the upside break even at 39.57 or the downside break even at 38.73 and in fact if we move forward to february 22nd you'll see that the market closed within a few points of the downside break even and so it's time to widen the zone of profit as we discussed and so what we could have done in this case is to add a second 10 lot call calendar spread at 38.75 one point below where the market closed at 38.75 a formation which is known as a double calendar spread now again in this case the optimal price for the market to close is 38.75 as you can see from the illustration but remember we never closed the first calendar trade and so both the first and second calendar spreads are now in play and graphically when you combine the profit zones they sort of merge and look like this with two peak prices one at 38.75 and another 39.15 the centers of both call calendar trades and when you combine the two trades into a single trade you can see that we've widened the profit zone to the downside such that the new break even is now 38.52 and this was accomplished by adding that second call calendar spread at 38.75 and so let's take stock of where we are from a cash flow perspective for a minute on this trade as you can see we originally brought in 27 690 from selling the original 2915 calls because each option represents 100 shares of stock and we sold 10 of those so that results in our bringing in that amount but then we paid out close to 38 000 to buy the farther out calls expiring 12 days later as you can see from the calculations as for the second call calendars down at 38.75 you can see we brought in and paid about the same amounts for the short and long calls as we did for the 2915 original call calendars resulting in a total cost of the trade once the second call calendar was added for a complete cost of 23 940 for the entire trade okay so now let's move to the day that the short options of both of the call calendars expire which is february 24th and as you can see in the morning the spx index had moved up to 38.91 and so with five hours to go before the short options expire let's analyze what the result would be if we closed the trade at this point and why so let's start with the original 2915 calls and as you can see those originally brought in over 27 000 but as you can also see closing them would only cost 1200 because the market is trading at 38.91 and would have to rally really strongly in the next five hours to give any value at all to those short calls so they aren't worth very much at all so we made really good money in those short calls obviously but on the other hand we originally paid 38 000 for the long calls in the original 3915 calendar but the markets moved down to 38.91 since then so they've dropped in value to a little less than 16 000 so we took a bath on those now the 3875 calls are interesting because we sold those when the market was at 38.76 but the market has rallied a bit since we sold those so you'd think they'd be more expensive to close and buy back but because there's only five hours before those short calls expire the market is assigning close to what they'd be worth if the market closed right around where it was trading at 11 in the morning and with the market at 38.91 that's 16 points above the strike price of those calls so they should be worth let's say sixteen dollars and they are in fact five dollars more than that at 21.01 because the market could rally further before the close but there's only five hours for that to happen and so the market is only charging about five dollars for that risk and that explains the 2101 price and so because of the passage of time and the proximity to expiration we actually make money on those short calls even though the market rallied have been since they were sold but now look at the farther out 38.75 calls that we paid a little over 37 thousand dollars for well those have appreciated because the market rallied since we bought those as part of the second group of calendars four days into the trade and remember we're long those calls but those aren't dying in five hours like the short calls those are alive for another six days and so those have appreciated mildly since we bought them as you can see to 38 570. and so when you add up all the debits and credits which result from our entering into the two calendar spreads and then close them we end up with a positive cash flow of thousand three hundred ninety dollars which is our profit on the trade a return of thirty five percent in six days which ain't bad so what i'd like you to take away from today's lesson is that options traders have a lot of tools at their disposal such as the calendar spread to trade ranges of prices around the current market price and if the market moves there are ways of expanding that range that are very powerful and can create excellent return opportunities as you can see from this example where we made 35 in six days once you develop the skills to recognize the use of these various trading tools it's just a matter of applying your knowledge to the current market situation and greatly expanding your opportunity for trading wins now just to remind you if you're serious about your trading you need to check out the free intensive options class that we're currently running where you'll learn three real world options strategies that our professional options traders use all the time just click the link that should be appearing now at the top right corner of your screen or you can just head on over to optionsclass.com to register for this free workshop directly it really is a rare opportunity for retail traders and investors to learn directly from wall street traders but that's exactly what you'll be getting through this free online workshop so click the link to sign up now before you miss it and please don't forget to click on the subscribe button right now so you won't miss all the free trading videos that we're posting constantly on our channel to help you to improve your game as an options trader

Channel: SMB Capital

Views: 13,270

Rating: 4.9557524 out of 5

Keywords: stock market, day trading, smb capital, trading, investing, markets, wall street, stock trading, options trading, options income, economics, finance, weekly options, calendar spreads, options spreads, weekly options strategy

Id: XPwibo0CLJA

Length: 14min 8sec (848 seconds)

Published: Wed Mar 03 2021