Trading Option Strategies the Right Way!
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At times when options are cheap, it seems like a good idea to buy them. One way to do just that is by using a calendar spread. In this spread, we buy an option with a strike near the current price, with more than a month to run. We then sell an option at the same strike, but with a nearer-term expiration.
The profit comes from the faster decay of the near-term option online option strategy calculator to the longer-term one. If price sits still, we profit online option strategy calculator the extent of the difference in time decay. A nice bonus on this trade, and the reason we might select it in this situation, is that it benefits substantially from an increase in implied volatility going forward.
This is because there is much more time value in the long-term options we own than there is in the near-term options which we are short.
A future increase in implied volatility will increase the value of all options; but it will increase it online option strategy calculator most for those options that already have the most time value. That means more distant options, like the ones we own. Here is an example. Implied volatility was near its low for the past year meaning that options were very cheap.
We could have bought a March-April 26 calendar as follows: The plan would be to hold the position until the expiration of the March options in two weeks. At that time all of the time value in the March options would be gone for sure. Assuming that they were not in the money at that time they would be worthless.
If JNPR stayed in that range for a couple of weeks, as we expected, then the trade would make money, assuming no change in volatility. The probability calculator indicated a probability of just over that price would remain within the range. Sounds pretty ho-hum, and it was — assuming no change in volatility. If online option strategy calculator volatility did rise from this extreme low, though, then things would get interesting.
If it should reach those more normal levels, our payoff would improve quite a bit. Disclaimer This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever.
Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be online option strategy calculator different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.