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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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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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•  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‘[email protected][email protected]=$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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