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Let’s say that we are bullish on a particular stock. We believe it’s going to rise in price.
Instead of buying an outright call, we can also buy a call calendar, a calendar spread. The reason for that is, we have a maximum loss we’re protecting. We’re also purchasing a call to protect us. In this case, it’s the June quarterly calls. So, what he want to do, is we want to purchase a very cheap “out of the money” call calendar spread, for 60 cents.
I call this a bullish calendar spread, because as the price rises toward the 145 strike level, that means the SPY would have to go up from 137 to 145. At 145, we would achieve our maximum profit.
You can see that’s true, if we look at the current price of the stock. It’s at 137. The most expensive call calendar spread is at the 137 strike price, for 1.10. The way we make money with a calendar, is if the price of the underlying stock expires exactly at the strike price that we’ve sold. If it were to rise up to 145, this 60 cents would then become 1.10. We would make our maximum profit.
Let me show you how that looks, on our profit picture. If we go to “analyze duplicate trade,” we’re going to get rid of our other one, here. This is called a bullish calendar spread. The actual price, the current price of the underlying stock, is down here, at $137.64. In order for us to make our maximum profit, the price of the underlying stock would have to rise all the way up to the 145 strike, which is the one that we’re selling, and the one that we’re buying.
We’re only paying 60 cents for that calendar spread. If it were to rise to 145, we would achieve our maximum profit, by expiration. The most we could lose is 60 cents. With a calendar spread, the most you can lose on any of these spreads, is the price that you pay for the calendar.
You can see that our margin requirement is only $60. If we extend our graph out, you can also see that the maximum loss is $60, no matter how high the price went, and no matter how low the price went.
That is a bullish calendar spread. In other words, you’re determining that the price is going to rise until expiration, and then you would achieve your maximum profit at the price that you purchased this calendar spread.
Let’s go back to our trade tab for a second. The nice thing about calendar spreads is that you can buy them, just like you can with an iron condor. You can buy them on the put and the call side.
Let’s say you’re modestly bullish, but you’re also modestly bearish. You think that the prices are going to fluctuate, within a certain range. Let’s say you think the price might rise up to $140. You also think it might drop at the lowest point, to maybe $134.
Now, let’s take a look at what that does to our profit picture. It’s very interesting, isn’t it? Instead of the single tent, like we had before, if the price were to rise up, we would achieve our maximum profit of $104 on a bullish calendar spread. Now, we also have a put calendar spread. We have two places at which the final price of the underlying stock could settle, on expiration day, and we would achieve our maximum profit.
In this case, it’s 140, because we have a 140 calendar spread. On the downside, 134, because we have a 134 calendar spread. All we did was take one calendar spread, and add another one to it. Now, not only do we have a much wider profit margin, and potential for profit in this position, but we also have a little bit wider breakevens. We have 142, down to 132.
If we were only to do the bullish calendar spread, then our breakeven points would be at 136 and 144. By adding the bearish calendar spread, we’ve extended our breakeven all the way down to 132. That’s what we’ve done here. We’ve created a double calendar. That’s what a double calendar is. It’s two calendar spreads – a call calendar spread, which is slightly bullish, and a put calendar spread, which is slightly bearish.
If we were to take off the call calendar spread, you can see that the maximum profit would be achieved on this calendar spread, if the price of the underlying would move down. It would be in our potential profit area of our calendar spread. When we put both of them together, we have a slightly wider range, in which our prices can move to achieve a profit.
We also have a greater Theta. When we add these positions together, you can see that one side has a 38 cent Theta. If we add both of them together, we have an 83 cent Theta. Of course, that Theta will increase in time, as we get closer to expiration.
Now you’ve been introduced to vertical spreads, the sale of vertical spreads, combining the sale of vertical spreads into an iron condor, calendar spreads – both at the money, and a bullish calendar spread, and a bearish calendar spread. And then the combination of the two types of calendar spreads, both on the call side and the put side, to create a double calendar.
I hope this was helpful to you, to understand the type of positions and how we profit from them. I really do hope that it helps clarify, at least for some of you guys, the very foundation of what we’re trying to achieve – which is positive Theta positions, the spreading of a wide range of breakeven points, combining vertical spreads or combining calendar spreads in order to achieve our objectives.
We did about two hours, today. Please review this video as many times as you feel necessary, in order to really understand the basics of what we’re doing here. This is the foundation of building positions, is understanding the types of positions that we put on. We’ve covered the iron condor, we covered the double calendar. We did the calendars, and we did vertical spreads. This is really a very important foundation for you guys, to understand exactly how these positions profit. Also, how to put them on, understand why we do both the sale of options and the purchase of options, to protect ourselves.
If you have any questions about this video, or anything I went over today, please do not hesitate to ask me questions at tradeology@gmail.com. I wish you guys all the best. Go out there and trade with confidence.