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zxcv64

Reducing the mistakes I make when trading Calendars

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Thank you for sharing your experience. The last paragraph is the vital part.

Can you share a bit more of your experiences regarding trading rules and psychology. SO mostly trades Pre-earnings calendars which are a different category due to high gamma resistance than regular calendars. I trade weekly double calendars with indices (SPX, NDX) with IV backwardation in front and back dated options. I feel this is the pre-defined "edge" in these calendars.

1. Rules to follow- Can you please share your trading rules. Do you scale up gradually or enter all at once. What if IV drops after you enter. My biggest obstacle has been timing the entries. As you hinted above the calendars drop in value as the day goes by, which means it better to sell at the beginning of the day (esp on T-0). Do you have any suggestions on entry times.

2. Do you have (hard) stop loss? If so, whats your criteria- gamma (price moved away from the profit tent) or IV drop or time left in the trade (waiting till T-X)

3. Hedging- Since calendars are short gamma, how do you hedge?- add another calendar (more short gamma) with the direction of the price movement? if so when? or add long gamma to counter short gamma such as call/ put or a vertical or a ratio trade

4. Do you follow 10% rule like SO does for allocation per trade. I have personally been starting with 10% and go up to 20% if I have to add capital to hedge.

5. Is it a good idea to scale up when the IV is dropping like the environment that we are in now. IV has been held up last 3 months due to market volatility which is now deflating like a balloon.

Thank you so much for starting this conversation. Always helps when experienced traders share their personal views and experiences.

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4 hours ago, SureTrader said:

1. Rules to follow- Can you please share your trading rules. Do you scale up gradually or enter all at once. What if IV drops after you enter. My biggest obstacle has been timing the entries. As you hinted above the calendars drop in value as the day goes by, which means it better to sell at the beginning of the day (esp on T-0). Do you have any suggestions on entry times.

The most important trading rule is to ensure that the RV at entry is good. Normally, I look to enter if the RV is below the average, but will sometimes enter at a higher RV if the VIX is much higher than normal. I trade mainly the tried-and-tested cal candidates; if I find a new stock I will only commit  a small amount of capital as a trial.

 

Yes, I scale up gradually. I rarely enter the cal trade all at once. It's in drips and drabs - buying a few lots here, a few more there. (We, as individuals, have an advantage here over the official SO trades - we can buy a couple of contracts at the 510 strike, another 3 lots at the 500 strike, etc etc.) I often have multiple strikes, a combination of calls and put cals on the same stock. Eg for NFLX, GOOG, AMZN etc, I can often have cals on 5+ strikes. Closing some, opening some others, closing some more etc. It's a fluid thing.

 

Timing the entries - again it's mostly RV based, rather than time based - there's no particular day that's better than others. So, I have lots of orders open and sometimes none of them get filled, and sometimes I'm lucky and can buy something at a good price.

4 hours ago, SureTrader said:

2. Do you have (hard) stop loss? If so, whats your criteria- gamma (price moved away from the profit tent) or IV drop or time left in the trade (waiting till T-X)

Never had a hard-stop on calendars. The wide spreads, and wildly fluctuating mid-price on some of these can kick me out of a trade un-necessarily. On IB, I've often seen my cal show an unrealised  -20% loss and then a 10% profit a couple of hours later, because of the way TWS calculates the unrealised profit/loss.

 

My criteria if the stock moves too much is - "Can I close the current cal at B/E? or a small loss?" If Yes, then do so. If No, then consider opening a new cal at the new stock price (if RV still good). If I'm at T-1 or T-0, then I'll just take the loss and close. Adjustment (by opening a second cal) becomes less of an option the closer we get to T-0. Often though, I will start reducing the position size as I see the cal heading towards a loss. See above comment about have cals at multiple strikes and opening/closing cals fluidly.

 

4 hours ago, SureTrader said:

3. Hedging- Since calendars are short gamma, how do you hedge?- add another calendar (more short gamma) with the direction of the price movement? if so when? or add long gamma to counter short gamma such as call/ put or a vertical or a ratio trade

Other than opening a second cal, I don't hedge. I haven't added any put/call verticals - not that I don't agree with them, just that I haven't looked at the possibilities. I don't want to complicate the trade.

4 hours ago, SureTrader said:

4. Do you follow 10% rule like SO does for allocation per trade. I have personally been starting with 10% and go up to 20% if I have to add capital to hedge.

Yes, every time. I never exceed 10% on any one stock. It's temping, but a lot of red ink in the past has shown me the importance of position sizing.

4 hours ago, SureTrader said:

Is it a good idea to scale up when the IV is dropping like the environment that we are in now. IV has been held up last 3 months due to market volatility which is now deflating like a balloon.

Not sure what you mean my 'scaling up'. Right now, I have no cal trades open at all. But within a couple of weeks, a lot of stocks will have confirmed earnings and then I will be looking to enter - again the main thing is the cal RV. IV rises and falls in any medium level time period (say a month), and there is no way of knowing which way it will go. It doesn't prevent me entering cals. Also, with cals, as you know, it's the IV backwardation that's important - which is a fancy-shmacy way of saying "The main thing is not so much the IV, but the DIFFERENCE in the short IV and the long IV". The general market IV can fall, but if our short IV falls much more than our long IV, then we can still make a profit.

(I think falling IV is more of an issue for the straddle trades, where we don't have shorts.)

 

@SureTrader, all of this is for SO earnings calendar trades. You trade a lot of non-earnings/Index-based double cals. If you are happy to post your current/next trade on your thread (https://steadyoptions.com/forums/forum/topic/6757-weekly-double-calendars-on-indices-spx-ndx-djx/ ), then maybe we can discuss the specifics of dbl cals on there.

 

 

Edited by zxcv64

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