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

  • Trading Earnings With Ratio Spread

    A 1x2 ratio spread with call options is created by selling one lower-strike call and buying two higher-strike calls. This strategy can be established for either a net credit or for a net debit, depending on the time to expiration, the percentage distance between the strike prices and the level of volatility.

    By TrustyJules,

    • 0 comments
    • 353 views
  • SteadyOptions 2023 - Year In Review

    2023 marks our 12th year as a public trading service. We closed 192 winners out of 282 trades (68.1% winning ratio). Our model portfolio produced 112.2% compounded gain on the whole account based on 10% allocation per trade. We had only one losing month and one essentially breakeven in 2023. 

    By Kim,

    • 0 comments
    • 4,662 views
  • Call And Put Backspreads Options Strategies

    A backspread is very bullish or very bearish strategy used to trade direction; ie a trader is betting that a stock will move quickly in one direction. Call Backspreads are used for trading up moves; put backspreads for down moves.

    By Chris Young,

    • 0 comments
    • 8,321 views
  • Long Put Option Strategy

    A long put option strategy is the purchase of a put option in the expectation of the underlying stock falling. It is Delta negative, Vega positive and Theta negative strategy. A long put is a single-leg, risk-defined, bearish options strategy. Buying a put option is a levered alternative to selling shares of stock short.

    By Chris Young,

    • 0 comments
    • 8,754 views
  • Long Call Option Strategy

    A long call option strategy is the purchase of a call option in the expectation of the underlying stock rising. It is Delta positive, Vega positive and Theta negative strategy. A long call is a single-leg, risk-defined, bullish options strategy. Buying a call option is a levered alternative to buying shares of stock.

    By Chris Young,

    • 0 comments
    • 9,098 views
  • What Is Delta Hedging?

    Delta hedging is an investing strategy that combines the purchase or sale of an option as well as an offsetting transaction in the underlying asset to reduce the risk of a directional move in the price of the option. When a position is delta-neutral, it will not rise or fall in value when the value of the underlying asset stays within certain bounds. 

    By Kim,

    • 0 comments
    • 8,487 views
  • Diagonal Spread Options Strategy: The Ultimate Guide

    A diagonal spread is a modified calendar spread involving different strike prices. It is an options strategy established by simultaneously entering into a long and short position in two options of the same type—two call options or two put options—but with different strike prices and different expiration dates.

    By Kim,

    • 0 comments
    • 10,428 views
  • Gamma Scalping Options Trading Strategy

    Gamma scalping is a sophisticated options trading strategy primarily employed by institutions and hedge funds for managing portfolio risk and large positions in equities and futures. As a complex technique, it is particularly suitable for experienced traders seeking to capitalize on market movements, whether up or down, as they occur in real-time.

    By Chris Young,

    • 0 comments
    • 13,696 views
  • 7 Skills You Have To Master To Play In The Asset Management Space

    Let’s start with the obvious: if you can’t predict market trends, you’re playing pin the tail on the donkey with your, or worse, someone else’s investments. Reading market trends isn’t about gazing into a crystal ball; it’s about understanding economic indicators, market sentiment, and, occasionally, why everyone suddenly loves avocados.

    By Kim,

    • 0 comments
    • 7,273 views
  • Why New Traders Struggle: 3 Key Concepts New Traders Never Grasp

    Everyone knows the statistic - 95% of traders fail. Whether or not that's an accurate statistic, it's certainly true that few that attempt trading ever make life-changing money. Part of that is because most don't take it seriously. But what about those that do and fail?

     

    By Pat Crawley,

    • 0 comments
    • 10,753 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