SteadyOptions is an options trading forum where you can find solutions from top options traders. Join Us!

We’ve all been there… researching options strategies and unable to find the answers we’re looking for. SteadyOptions has your solution.

How We Lost 60% on SPX calendar


Experienced traders know that nothing teaches you more than losing trades. We all would like all our trades to be winners, but we know this is not possible. We know some of the trades will be losers (at least I know that, I hope you don't expect all your trades to be winners). And the bigger the loss, the more you learn. Today I would like to dissect our biggest loser in the last 2 years.

This year's sideways market has been very kind to calendar spread trades.We booked few very nice winners with SPX and RUT calendar spreads. When we opened another SPX calendar spread on August 5, I expected another nice winner. But the market had very different plans.

 

The strike was 2100, which was right in the middle of the range for the big part of the year.

 

Last Thursday, August 20 SPX was at 2061, and the trade was still in decent shape, down only 8%:

 

3e29f915f464bed7560cae03f859d375.png

 

However, as the selloff accelerated towards the end of the day, the trade was down around 20-25%.

 

At this point I considered different adjustment options but didn't find an efficient and inexpensive hedge. So my plan was just to close the trade around 30% loss. I tested different adjustments and didn't find them too efficient, so considering the fact that we also had a butterfly trade that was expected to offset the loss, it was an acceptable result to me.

 

However, SPX really collapsed at the last hour on Thursday, and the trade went through the stop loss in matter of minutes. I assume that most members wouldn't have time to act on the alert sent 5-10 minutes before the close. Spreads also became very wide, and I doubt we could close it anywhere near the mid. On Friday SPX gaped down another 20 points and the trade was down over 50%. By the end of the day the loss was 70%+.

 

f0f7ae4b641231f350746a9f931bfac5.png

 

We used yesterday's rally to reduce the loss and closed the trade for 60% loss.

 

To put things in perspective, SPX went down 130 points in 3 trading days. Last time it happened was 2011.

 

So what could we do differently?

 

In the wise words of one of our mentors, Dan Sheridan, "just buy a stinking put!" Dan survived on the floor of the CBOE trading options for over two decades, so he's experienced it.

 

Lets see how things would be different with the put.

 

When SPX went through our adjustment point, we could buy the 1750 put for just 0.75. This is how the P/L chart would look like with the put:

 

92f5f144bb5d5c63f2e0c2756dc12a87.png

 

As we can see, the chart looks much "smoother". But even more important, it significantly increases the vega, which helps in case SPX continues down and volatility increases.

 

Fast forward to Friday morning:

 

e198037a19d48fa33702409dc1c8a277.png

 

That's right. Instead of being down 50%+, we would be actually UP 41%.

 

So what can we learn from this trade?

 

The most important thing is "don't assume anything". Gaps happen and should be taken into consideration. If the market went down 60 points and became oversold, it doesn't mean it cannot go lower. Don't let your opinions impact your risk management. When in doubt, cut the loss or "just buy a stinking put!"

 

This trade emphasizes once again the importance of position sizing. In our model portfolio, we recommend allocating 10% per trade. Which means that this trade had a 6% negative impact on the overall portfolio. Not pleasant but not catastrophic and allows us to leave another day. After closing 9 consecutive winners in August, we are still having a great month, while most major indexes are significantly down.

 

Related posts:

 

How We Made 23% on $QIHU Straddle in 4 Hours
How Position Sizing Impacts Your Returns
How we trade calendar spreads

 

We invite you to join us and see how we manage our portfolio of non-directional strategies.

 

Start Your Free Trial

What Is SteadyOptions?

Full Trading Plan

Complete Portfolio Approach

Real-time trade sharing: entry, exit, and adjustments

Diversified Options Strategies

Exclusive Community Forum

Steady And Consistent Gains

High Quality Education

Risk Management, Portfolio Size

Performance based on real fills

Subscribe to SteadyOptions now and experience the full power of options trading!
Subscribe

Non-directional Options Strategies

10-15 trade Ideas Per Month

Targets 5-7% Monthly Net Return

Visit our Education Center

Recent Articles

Articles

  • Covered Calls Options Strategy Guide

    Covered calls have always been a popular options strategy. Indeed for many traders, their introduction to options trading is a covered call used to augment income on an existing stock portfolio. But this strategy is more complicated, and riskier, than it looks.

    By Chris Young,

    • 0 comments
    • 219 views
  • How Options Work: Trading Put And Call Options

    Learning how options work is a key skill for any trader or investor wanting to add this to their arsenal of trading weapons. It’s really not possible to trade options well without having a thorough grounding of the mechanics of what these derivatives are and how they work.

    By Chris Young,

    • 0 comments
    • 406 views
  • Protective Put: Defensive Option Strategy Explained

    The protective put (sometimes called a married put) strategy is one of the simplest, but most, popular, ways options are used in the market. Here we look at this defensive strategy and when and how to put it in place. Options provide investors and traders with an extremely versatile tool that can be used under many different scenarios.

    By Chris Young,

    • 0 comments
    • 637 views
  • The Surprising Secret to Proper Portfolio Diversification Revealed

    During a discussion about my trading system, the question arose regarding the ability to exit positions entirely and mitigate substantial drawdowns during a crash-style event. This particular circumstance has caused concern about the effectiveness of the trading method. The common response to such concerns is often centered around the concept of maintaining a properly diversified portfolio.

    By Karl Domm,

    • 0 comments
    • 1,391 views
  • Options Trading Strategy: Bear Put Spread

    Options can be an extremely useful tool for short-term traders as well as long-term investors. Options can provide investors with a vehicle to bet on market direction or volatility, and may also be used to collect premiums. A long options position is simple to use, and has defined risk parameters.

    By Chris Young,

    • 0 comments
    • 1,347 views
  • Market Chameleon Trial Offer

    We are pleased to announce that Market Chameleon is offering SteadyOptions members a 2 week free trial for their premium tools. Market Chameleon is a premier provider of options information, using both stock fundamentals data as well as options analytics to provide better insight for those who wish to make informed investment decisions.

     

    By Kim,

    • 0 comments
    • 1,478 views
  • Where Should You Be Investing Your Money?

    Everyone should be investing. After all, there’s no better way to increase your retirement savings and boost your spending power than by putting your money to work. Many people believe that investing is something that only wealthy people or financial experts can do, but that’s not the case.

    By Kim,

    • 0 comments
    • 1,356 views
  • Options Trading Strategy: Bull Call Spread

    The bull call spread is a simple strategy that can be used by novice options traders to bet on higher prices. Options can be an extremely powerful tool in the trading arsenal of those that know how to use them, and long options positions can be used to bet on a market rise or decline, with limited risk and potentially unlimited profit potential.

    By Chris Young,

    • 0 comments
    • 1,520 views
  • Stock Option Strike (Exercise) Price Explained

    The option strike price (also known as the exercise price) is a term used in options tradingOptions are derivatives. These financial instruments are ‘derived’ from another underlying security such as a stock, and give the right (but not the obligation) to buy or sell the underlying at some point in the future.

     

    By Chris Young,

    • 0 comments
    • 1,748 views
  • Mastering the Art of Options Trading: Tips for Small Accounts

    Growing a small trading account with options can be a challenging task, but it is definitely achievable. When I began my journey in trading options, my goal was to double my small account every three months. However, I quickly learned that taking excessive risks without proper risk management would only lead to starting over again and again by adding new funds to my account.

    By Karl Domm,

    • 0 comments
    • 2,433 views

  Report Article

We want to hear from you!


Hi Kim,

Is there any particular reason why you will choose the 1750 strike vs other strikes? Is it because of the delta?

Share this comment


Link to comment
Share on other sites

There are no firm rules. I usually aim to reduce the delta by ~50-60%, but at the same time not to pay too much for the hedge.

Share this comment


Link to comment
Share on other sites

Very good analysis, Kim. The put is certainly a very appropriate adjustment. Next time we won't get caught in the downslide.

Share this comment


Link to comment
Share on other sites


Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account. It's easy and free!


Register a new account

Sign in

Already have an account? Sign in here.


Sign In Now

Options Trading Blogs Expertido