If you get there, go to our courses page, select the options trading section, and there you’ll see some of the other option trading courses that we have available. Then, you can go ahead and click on the calendar course, and you can seeeight more advantages to trading options and calendar spreads,which I’m sharing just because of the recent course we’ve released.
Let’s look at some potential motivations for trading option spreads and, roughly speaking, some of the advantages associated with them before discussing calendar spreads.
The first reason is that there is less cash at risk.
Let’s look at NVIDIA here as an example when looking at any trade or investment and beginning to consider adding some shares. If you try to purchase this stock, it is currently trading for $104.33 per share, according to our analysis of the stock market. If you use a calculator to figure the price per share at $103.43 and multiply that figure by 100 shares, the cost of placing a trade for 100 shares comes to $14,000.
One advantage of trading options is that you don’t have to have a single direction for the stock;
Instead, you can say, “Hey, I’m slightly bullish” which allows the trader to adjust where they position these things. In addition, you get to profit every single day that stocks remain unchanged, as long as they are in your sweet spot or range, or even just slightly above or below it.
One reason is that you can play this stock directional for $1,000 rather than putting up much more money when you put on a spread like this with less capital. You might be asking what the returns are on that.
Reason number two is the higher percentage of return
So when we look at the return you’re going to get on these investments, I’m going to put this on bullish just like I would with a stock. Let’s pretend that the stock is going up to 160, and it takes a few weeks or a couple of days for it to get there. I’m risking roughly $872 to be able to do that.
If it occurs slowly, I’ll move the time forward. Let’s say your annual salary is $530. It might be here, in which case the cost is $330. So you’re making between $15,000 and $16,000 each year. Well, it’s a lot more, but the investment was only approximately $14,000, so that’s only $1600.
How do these sixteen hundred dollars compare to fourteen thousand? First, you’re only making about 11 percent, depending on the movement, time expiration, and the like. You’re only making about half that, but overall, the calendar spread or an options trade will allow you to profit significantly more on the return percentage because it is much higher and more significant. After all, you are also profiting from the option contract’s decay.
Reason number three, you can be non directional
It doesn’t matter if the stock goes up or down; all that matters is that you stay in your sweet spot. Now you could set up that sweet spot on the bullish side. As I’ve shown you, you can set it up on the bearish side, but I’ve put it a little more in the middle. As long as time moves forward and I stay within this 130-to-160 range, the amount I make today, which may be either 116 dollars or 166 dollars if I go up and reach 155, is where this white line is. It doesn’t matter if I drop the price to 135. I could move this farther to the upside if I think the stock is going up, but that would mean I would have less money.
Again, as you age, you continue to degrade, earning you a little extra money;you have the flexibility not to be directional.So it has to increase for me to make money; it’s not just, you know, buying one thing.
Reason Number Four: You can now make money through time decay in stocks
That is the only way you can make money in a buying position. The time is still here. You cannot benefit from time decay. Dividends are a source of income. That’s one source of income you have, but it’s unrelated to time passing. It’s from a business that is disbursing its dividend.
Though in theory, it should be time decay, in practice, it isn’t. More frequently, businesses are disbursing funds to you as a portion of their profits. That will only happen with some stock.With options, however, you profit from time passing.The 30-day option decays a lot quicker than the 60-day option. So you’re carrying it out right now.
Consider that you are now selling one at 43 days and acquiring one at 77 days. Why, then, does the next month degrade more quickly? You’re probably aware that bananas degrade much faster than apples for the same reason. Since bananas rot far more rapidly than apples, you’re attempting to dispose of them here. It resembles going to a baseball game in specific ways. First, it might be able to pay the total price for a ticket. Likely, they are only attempting to sell those tickets if the game has already begun and you are three innings into it. The game will eventually conclude, and if they still have tickets left over, they won’t be able to sell them for anything.
You might occasionally make some money. Since thistheta affects its value, you will still profit over time, even if the stock or option is genuinely worthless.In our case, a daily expense of $11 would result. If you’re trading more contracts, higher-priced stocks, or options, it could be $207. It all depends on your level of experience.
Reason number five, which is greater flexibility.
When it comes to trading options, compared to stocks, they are more adaptable. Once more, if you look at a stock, your only options are to go up and make money or go down and lose money. You can manage your position based on the number of shares you have. If I had 500 shares, I could manage it by removing or adding 100 shares, 50 shares, etc. You can control your position by the position size, but there is little flexibility with options beyond that.
For example, I could change my bullishness to be greater or less, but you could also control how long the event lasts. Consider the scenario where you want to invest for the long term, just like a regular person, but you also want to profit from time decay.
You could, however, put it on, go out for 300 or 700 days, and then take it off when it’s almost time for expiration and put another on. So if you’re looking for something short-term, you could look into shorter-term options.
Furthermore, you can begin to distort these facts. I want you to see how my calendar has been even more skewed and how my mindset has shifted to be even more bullish if I start gently rotating them and the positions. You can see that my risk profile for long-term investing has significantly increased. Because you can begin skewing, modifying, and rotating them to meet your needs and the flexibility provided by these options contracts, you can see that the flexibility is substantially greater.
Due to that temporal decay, even if it remains static, I will still make $26 per day and have some room left over until I break even. Will I continue to profit from this data, or is time passing? I could stack two of these on top of one another or rotate them a little more to make them bearish. Let’s say I stack ten of these and call it the 1960s. I’ll demonstrate here how to recreate this and replicate April and March. This offers much greater flexibility than using stocks because I could go to the 160 here, enabling me to set up two spreads, one at 150 and one at 160.
It depends on whether I want a small amount of risk or danger in each location. That can occasionally be both advantageous and detrimental. Trading calendars gives you much more flexibility than just trading stocks, but it depends on your trade. If you only invest in stocks and have basic stock investments, it is fine to have a large number of stocks that are comparable to standard stocks.
Stocks have the drawback of being long delta when they are short, which means that when they retrace, it costs you on the delta side, even though this might be a problem if you know how to manage your alternatives.
Reason number six is Hedge or Protect Yourself
Let’s assume I take this action and profit when the price declines. However, keep in mind that I already own the stock. By stacking this bearish position on top of it, I stretch my breakeven point and profit a little bit on my theta. Even though I’m still long on this stock, I have a little extra room for safety because if it falls to 138, I’ll lose about $2,800. What a large chunk of cash! I will profit by about $700 if the option expires with a 138. So overall, you earn 700 while losing 2,100. Keep in mind that you might stay up much later as time goes on and things worsen.
Reason Number seven — Positive Vega
Look at another explanation closely related to calendars: their positive Vega. In other words, when you look at positive Vega, it just implies that when I place this trade and consider my Vega exposure, I have a positive Vega position as opposed to when I execute an iron condor or a butterfly, in which case I have a negative Vega position.
The fascinating thing about these calendars is that I reset my date when I set this up to the 150th spot on the calendar. If volatility pops five, which signals that people are panicking, this calendar grows and expands as prices continue to decrease with a positive Vega position. It helps me when prices drop or gives me a little more cushion when the calendar gets longer.
When you do something like a butterfly or an iron condor, which gives you that extra cushion on that downside move, it helps minimize some of the overall pain, especially when you have that positive Vega exposure from the calendars. Since you still have a positive delta, you won’t become entirely profitable immediately, but overall it helps ease some of the hardship. It’s one of the reasons I like calendars from that perspective.
Reason number eight is that it has a slightly faster time decay than iron condors.
The reason for this is that, although it depends on the type of spread you’re using, if you’re using an iron condor, keep in mind that the sweetest and juiciest option is always that money. Also, it’s a good balancing situation when you compare positive and negative Vega trades and the decay speed you know from time to time on your spreads and positions because butterflies decompose quickly, whereas calendars decompose much faster.
Since strikes on the money get the highest premiums and hence the fastest temporal decay, anything on the money will often depreciate far more quickly than something out of the money. This is great if you wish to engage in short-term trading.
Additionally, you can use calendars for them. Additionally, you can trade calendars on equities with rising or falling values. Iron condors can be implemented on smaller and larger-priced stocks, but iron condors are slightly more challenging to execute on smaller-priced stocks because you need to get further out. Additionally, because you’re essentially working with the same strike price, calendars are simpler to alter than other options trading methods. This makes it a little bit simpler for you in that respect. Additionally, they are simpler to change than other trades, rather than becoming overly intricate when shifting a single leg or a butterfly with a damaged wing spread.
