special topic option strategies - candlecharts academy...special topic option strategies: calendar...

SpecialTopicOptionStrategies:CalendarSpreads

BrianHouston,NisonCer0fiedTrainer™

www.mycandlecharts.comwww.candlecharts.comwww.candlechartsacademy.com

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Although these areacceptedfromsitevisitorsandcustomersingoodfaith,wehavenotindependentlyexaminedthetradingrecordsofanycustomersandthereforehavenotverifiedanyspecificfiguresorresultsquotedtherein.Forthisreasonyoushouldassumethattheirresultsarenottypical.Norepresenta0onisbeingmadethatanyaccountwillorislikelytoachieveprofitsofanykind.Generally-expectedcustomerresultsare thatall traders losemoneyanddonotbecomeprofitable, regardlessof the training they receive -- trading isahigh-risk specula0veac0vityand there is significant riskoffinancial lossinvolved.Tradinginvolvesasubstan0aldegreeofriskandmaynotbesuitableforallinvestors.Pastperformanceisnotnecessarilyindica0veoffutureresults.CommodityFuturesTradingCommission(CFTC)Rule4.41HYPOTHETICALPERFORMANCERESULTSHAVEMANYINHERENTLIMITATIONS,SOMEOFWHICHAREDESCRIBEDBELOW.NOREPRESENTATIONISBEINGMADETHATANYACCOUNTWILLOR ISLIKELYTOACHIEVEPROFITSORLOSSESSIMILARTOTHOSESHOWN. INFACT,THEREAREFREQUENTLYSHARPDIFFERENCESBETWEENHYPOTHETICALPERFORMANCERESULTSANDTHEACTUALRESULTSSUBSEQUENTLYACHIEVEDBYANYPARTICULARTRADINGPROGRAM.ONEOFTHELIMITATIONSOFHYPOTHETICALPERFORMANCERESULTSISTHATTHEYAREGENERALLYPREPAREDWITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADINGDOESNOT INVOLVE FINANCIAL RISK, ANDNOHYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THEIMPACTOFFINANCIALRISKINACTUALTRADING.FOREXAMPLE,THEABILITYTOWITHSTANDLOSSESORADHERETOAPARTICULARTRADINGPROGRAMINSPITEOFTRADINGLOSSESAREMATERIALPOINTSWHICHCANALSOADVERSELYAFFECTACTUALTRADINGRESULTS.THEREARENUMEROUSOTHERFACTORSRELATEDTOTHEMARKETS INGENERALORTOTHE IMPLEMENTATIONOFANYSPECIFIC TRADINGPROGRAMWHICHCANNOTBE FULLYACCOUNTED FOR IN THEPREPARATIONOFHYPOTHETICAL PERFORMANCERESULTSANDALLOFWHICHCANADVERSELYAFFECTACTUALTRADING RESULTS. 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www.candlecharts.com/disclosure

Brian has been trading stocks for over 37 years, and has devoted much of his trading career to trading options and creating options strategies. During that time, he has used Steve Nison's candlestick patterns and education to continually improve his knowledge and skills. Recently, Brian has has also added Elliott Wave theory to his set of trading tools, CFDs in Forex, Indices and Gold. BrianHouston,

NisonCer0fiedTrainer™

Which Markets

Your Favourite Market

TRADER’SSLANG

•  BullMarket

•  BearMarket

•  Support

•  Resistance

•  Trend

TRADER’SSLANG

•  Windows–bothrisingandfalling•  LaggingIndicators!

•  Oscillator–MACD,Stochas0cs•  MovingAverages

•  Candlesandtheircolors

Leverage

TheMul1plierEffectWhereaNisoncandlesignalconfirmsanotherindicator

OptionCalendarSpreads•  Sowhatdowedoandwhy?•  Whatisyourmarketmoveexpecta0on?•  3Strategies–

•  IntheMoney(bearishmarket)•  AttheMoney(neutralmarket)•  OutoftheMoney(bullishmarket)

•  Doyouseetrendsinthemarket?•  Whatarethecandlessugges0ng?

BullishEngulfing Pattern at Support

How NOT to use candlesticks

Oh my goodness! The market rallied after the shooting star!

OptionCalendarSpreads

OptionCalendarSpreads•  LEAPS–Longdatedop0ons•  Balancepricevsintrinsicvalue

StockPrice=$172.87MinusStrike-160.00IntrinsicValue=$12.87160Strike =$28.00MinusIntrinsic-12.87TimePremium=$15.13

OptionCalendarSpreads•  LEAPS–Longdatedop0ons•  Balancepricevsintrinsicvalue

StockPrice=$172.87MinusStrike-160.00IntrinsicValue=$12.87160Strike =$28.00MinusIntrinsic-12.87TimePremium=$15.13

OptionCalendarSpreads•  BuyLEAPCallfor$28.00

•  InTheMoney(ITM)•  Strikepriceof$160

•  SellaclosertoExpira0onCallwithahigherStrike•  May15,or•  June19

May175=$4.00LEAPcost$28.00COST=$24.00

June175=$6.00LEAPcost $24.00COST=$18.00

DecisionTime•  Decidewhichop0onyouwishtosell

•  IsthemarketinanUP,DOWNorSIDEWAYStrend•  Howlongun0lweresumeourtrenddirec0on

•  BigQues0on:ITM,ATMorOTM•  IntheMoney•  AttheMoney•  OutoftheMoney•  Thisallrelatestotheexpectedmarketdirec0onwithinapar0cular0meperiod!

OptionCalendarSpreadsMay175=$4.00LEAPcost$28.00COST=$24.00

•  1stQues0on–whydidIreducetheJune175Callpricefrom$8to$6?

•  2ndQues0on–isthisexactlyhowitlooksinreallife?

•  3rdQues0on–howdoImakemoneyandwhen?

OptionCalendarSpreads•  Over0meyourLEAP0mepremiumwilldecay•  Themarketisconstantlymoving–up,downandsideway!

•  YourLEAPwillreflectthismovement

•  NeartheMayExpiryofop0onswhathappens?•  CMEmovesup•  Mayop0onsdidnotexpireworthless•  Priortoexpira0on,ROLLyourop0ons!•  BuybacktheMayCallsandSellfurtherout!

RollingOutyourOptions-Example•  BuybackMayop0onsfor$1andSIMULTANEOUSLYsellCallfurtherout•  IntoJunemaybeandforwhatprice?•  MoreortheSame?•  Whatisthemarketexpectedtodonext?•  ITM,ATMorOTM

RollingOutyourOptions-Example•  Mayop0ons=$0soyouKEEPthe$4andtheyexpire

•  MarkethaspulledbackandthereforeyourLEAPSdropped•  WhatisexpectednextasaMarketmove?•  Areyouatsupport?•  AsyourMayOp0onsexpire,considersellinganotherop0onifappropriate

•  ITM,ATMorOTM

OptionCalendarSpreads•  WhatisyournewLEAPvaluewithamarketincreaseof$10

•  CLOSEOUT=SellLEAPfor$36–24–10=$2PROFIT!•  YourLEAPwillreflectthismovement

•  ROLLupandoutyourSHORTCALL•  Pay$10andreceivebackforJUNE$6•  LEAPhasincreasedinvalue,andSTRIKEis$10higher•  IWANTCASH$$$•  RollupyourLEAPby1or2Strikeprices•  HowmuchcanIaddtomyaccount?

OptionCalendarSpreads•  QuickSummary

•  RollupandoutyourSHORTCALL•  Cost$10–SHORTJUN185$6=-$4

•  ROLLupLEAPCALL•  Sellfor$36andBuy2Strikeshigher=$28•  Profit=$8•  NetAccountIncreaseof

Summary•  Thetradehaslastedlessthan1month•  Netintoyouraccountof$4•  Yourini0alcostoutofyouraccountwas$24•  S0llownLEAPS•  MarketisTrendingupwards(checkMovingAverages)•  AndyouhavehowmuchROI?

AddedTips•  TheBUY–WRITEorCalendarSpreadsworksamazinglywellinrela0velyflatmarketswithrepea0ngpaterns•  Youkeepreducingyourcostwhileyouwaitforthemarkettomove

•  Ifthemarketistrendingupwards•  Keepsellingcloserexpira0onsOTM–OUTOFTHEMONEYop0ons

•  Hopefullytheyexpireworthless•  IfyourLEAPSarecalled,youshouldhavereducedyourcostnicelyands0llgenerateaprofit

OptionCalendarSpreadsGM =$24.00LEAPSWhatisyourTimePremiumJan’21$15+$10–24=$1.00Jan’21$18+7.70–24=$1.70Jan‘22$15+11.25–24=$2.25Jan’22$18+9.20– 24=$3.20

WhatisyourMarketTrend?Jun$22+$2.85–24=$0.85Jun$23+2.20–24=$1.20Jun$24AllPremium=$1.62Jun$25AllPremium=$1.10

OptionCalendarSpreads•  Sowhatdowedoandwhy?•  Whatisyourmarketmoveexpecta0on?•  3Strategies–

•  IntheMoney(bearishmarket)•  AttheMoney(neutralmarket)•  OutoftheMoney(bullishmarket)

•  Doyouseetrendsinthemarket?•  Whatarethecandlessugges0ng?

CalendarTradeRisk•  Risk–simplytheNETamountofmoneyyouhaveinthetrade

•  PROVIDEDyouhavesoldtheshorterdatedcallsatleastashighasyourLongCallStrikeprice

•  Jan‘22$15@11.25MINUSJun$23@2.20=$9.05

•  PremiumonJan‘22$15=$2.25,soldJun$23$2.20•  Whatisyour0medecayonthe$2.25?•  Rememberyour45daytoexpiry!•  Howmany1monthop0oncontractscanyousell(over0me)?

RollingMid-Month•  WeseeGMstockdroptoanicesupportareabutwes0llhave0mebeforeourop0onsexpire

•  Whatdowedo?•  Whynotbuybackyourop0ons!

•  Jun$23$2.20whichnowhaveaweekorsoremaining•  StockDropped!!Soourvaluehasdropped!

•  Expectedbuybackat$0.50to$0.75•  Profittodateof$2.20–0.75=$1.45•  YourLEAPnowstartstoincreasewiththemarketriseandyoucanrolloutyourclosedatedop0onasandwhenthesignalsarepresent

CalendarSpreads-PUTS•  ThisworksexactlythesamewithPUTS•  Buyalongerdated(LEAP),ITMofaPUT•  Sellacloserdatedexpira0onmonthPUT

•  IdeallyOTM•  Ifthemarketcon0nuesdropping,con0nuerollingoutyourclosedatedop0ons

•  RollouttheLEAPSifyouwishforsomerealisedgain/cash•  Closetheen0retradewhenyoufindsolidsupport•  Youwillhavebenefitedfrom0mepremiums

QuickSummary•  CalendarSpreads•  BuyyourLEAPacoupleofstrikes(ormore)ITM•  Sellclosedatedop0ons(sametypeCALL/PUT)

•  Donesimultaneously•  WilldependuponexpectedmarketmovementnextBUT•  UsuallyjustOTM/ATM

•  TakeadvantageofTimePremiumdecay•  Rolloutandupyourop0onsdependingonmarketcondi0ons

QuickSummary•  KnowyourMajorSupportandResistanceareas•  Youmusts0llhaveamentalstopareawhereyouexitall•  NotlikelyholdyourLEAPSbeyond6months0llexpira0on

•  YoudonotwantTimePremiumdecayofyourLEAPS•  RolloutyourLEAPSifneeded•  LookforyourminorresistancewhensellingyourCALLs

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