Trading Calendars on Large Caps

[carnyc]

Have been thinking about trading calendars on lower volatility large cap stocks as a theta play.  For example, selling last week Sept. CVX 125C and buying October 125C.  The price is around .90 and theta disparity is about .025.  Decent gains can be achieved in about 5 or so days if the stock is stable, but I'm guessing that commissions would give reason for pause.  Thoughts?

[Kim]

This is pretty much what we are doing on IBM. 

[carnyc]

Thanks Kim for the swift reply.  Decent gains on IBM and GS calendars got me thinking about widening the application of the strategy.  They seem a bit more predicable than earnings straddles where IV doesn't always cooperate.  With the calendars, if the stock is stable, you will profit.  If the stock moves, you adjust the calendar and profit so long as the stock doesn't keep jumping around.  Will update this thread if I employ the strategy (successfully or not).

[Kim]

Well, the success definitely depends on the stock being stable.. This is why I like to combine those strategies with the earnings straddles. We also have seen on the current IBM trade the importance of taking profits - we gave up 20%+ gain in just one day after the stock started moving. And I still like GS as well, despite the our latest loss.

[carnyc]

Agreed.  I was able to profit on IBM and GS by exiting and adjusting at slightly different times.  It was probably due more to luck than anything else. Makes sense that these would balance well with earnings straddles which stand to perform well during large market moves. 
 
Thx again.
 


 

Edited September 18, 2013 by carnyc

[Kim]

I would probably limit the list to stocks above $100 - otherwise it will be too commissions consuming. 

[tjlocke99]

If you talk to folks who have done this for a while, and even I have experienced they'll tell you something like with calendars:

you eat like a mouse

but you get crapped on like an elephant.

 

sorry for the language.  the bottom line is that you an lose alot quickly that wipes out months of gains, so there is only so much you can allocate to these trades.

 

Thanks Kim for the swift reply.  Decent gains on IBM and GS calendars got me thinking about widening the application of the strategy.  They seem a bit more predicable than earnings straddles where IV doesn't always cooperate.  With the calendars, if the stock is stable, you will profit.  If the stock moves, you adjust the calendar and profit so long as the stock doesn't keep jumping around.  Will update this thread if I employ the strategy (successfully or not).