Hello, traders. It’s been a while since my last All-Star post, but I’ve teamed up with TradeKing blog editor Jude Stewart to help me get my thoughts down on paper (or Word doc) a little faster. So watch this space for a lot more regular blogging for TradeKing All-Stars from me!
It’s April, at the tail-end of earnings season. The market is stabilizing, with the VIX dropping from its stratospheric levels to around 37.80 – that’s historically still high, but it’s near the lowest levels the VIX has seen in the last 7 months. With volatility levels relatively low, the earnings-bump fading and price movement quieting down, it’s time to snooze, right?
Well, you’re welcome to take a spring nap – or you can take advantage of good conditions for short-term calendar spreads. Here are some pointers to get you started.
First, brush up on calendars by logging in to your TradeKing account, then heading to Education > The Options Playbook > Play # 27 (Long Calendar Spreads with Calls) or Play #28 (Long Calendar Spreads with Puts). Brian Overby and my fellow All-Stars Nicole Wachs and Doc Maher have all tackled calendars in the past posts, so those are worth checking out, too.
In a nutshell, a calendar spread is a neutral play in which you’re hoping for minimal movement in both legs of the trade for a specified timeframe. You can add a directional spin, if you wish, by adjusting whether your contracts are at-, in- or out-of-the-money. (See the Playbook for the full scoop on that.)
How to get started?
1. Cruise on over to Quotes + Research > Earnings Calendar and look for stocks that are at least 3 days past their earnings announcement. (I like to give stocks a few days to settle down fully after earnings.) That’ll give you a long list of candidates.
2. Look for stocks with relatively low options volatility. Here’s where the Volatility Charts, also under Quotes + Research, come in handy. You’re looking for stocks that are historically lower in implied volatility; putting on the trade immediately post-earnings will allow you to take advantage of a usually quiet period.
3. Lean towards the short-term in choosing your months. In this case, I’d suggest looking for a May contract to sell and a June contract to buy; June / July might also be a good combo. This puts your calendar smack in-between this earnings cycle and the next one, usually in July.
What happens if you sell a May and buy a September? Well, you could do that – but I can give you at least 3 reasons why not.
First, chances are that September contract will cost you more than the June, since you’re buying a lot more time premium.
Second, remember that volatility levels are still at historical all-time highs. Chances are good those will drop as the year progresses, so if you construct your calendar further-out in the future you’ll be more vulnerable to that happening.
Third, September is when all the traders waken from their slumber and start cranking CNBC and hanging on every earnings announcement. If you’re putting on a neutral trade, why court any extra excitement?
Join me for live trading in NYC, Boston or Ft. Lauderdale
I’ll be in Boston on 5/27, New York City on 5/29 and Ft. Lauderdale on 5/30, teaching my all-day CBOE Options Institute course, Real Trading with Dan Sheridan. For 9 hours straight we trade the markets live, complete with color commentary as market conditions impact our trades.
The price – normally $495, but $395 for TradeKing clients - includes a 3-hour followup session, so it’s a pretty great deal. Register today – I’d love to see you there!
--Dan Sheridan
Owner and Mentor
Sheridan Mentoring
All-Star Commentator
Read Dan's previous posts: Getting Familiar with Earnings Plays and Deciding When to Use Leap Calls
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options.
While implied volatility represents the consensus of the marketplace as to the future level of stock price volatility or probability of reaching a specific price point there is no guarantee that this forecast will be correct.
Any strategies discussed and examples using actual securities and price data are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy. In reading content in the Community, you may gain ideas about when, where, and how to invest your money. Although you may discover new ideas or rationale that may be compelling, you must ultimately decide whether or not to put your own money at risk. Consider the following when making an investment decision: your financial and tax situation, your risk profile, and transaction costs.
Dan Sheridan has a cross-marketing relationship with TradeKing.