Managing a Triple Calendar

[tjlocke99]

Kim and SO Friends,

I posted this under the RUT calendar post as well, but I know not everyone will see it there.

I am interested in a general practice for managing a triple calendar however I am providing my specific example below. Thanks!

I am currently in a RUT triple calendar 820 Put, 840 Call, and 860 Call:

long Jan 03 '13

short Dec 27 '12

I have a very small position.

I entered the trade last Thurs with RUT at 828.

Current the trade is slightly profitable with the 820 put down 22% though. However I have no idea how to close this. Should I close the whole trade or leg out and if so which should I leg out of first? I am thinking of closing the 840 which is up over 30% and than closing at the next available move towards 820 or 860.

Thank you!

[Kim]

I would actually do the opposite - close the 820. You goal is to keep the underlying under the tent as much as possible. So if you had 820/840 for example and the stock moved from 828 to 845, what would you do? Move the tent, by closing the 820 and opening the 860. Your current P/L is irrelevant - the only question is what is the position you want to own NOW? 820 provides some downside protection but very little theta which is the main goal of those trades.

[Marco]

well IB (not sure about other brokers) only lets you trade combos with 4 legs. However I think even if you could enter 6 legs I would try to close them one by one (each calendar). As usually you should get better fills. Spreads, if they cant be filled by lifting/hitting all offers/bid on the individual legs will go to a spread order book and then you have to find a MM who wants to trade your 4 legged combo - the odds (or rather spreads) are better you'll find someone willing to take the other side if you have only 2 legs.

I'd stick in all of them at mid and when the market moves one will be filled and then you get more agressive on the other offers or if you don't mind the directional risk (I would) then you can wait around a little longer and wait for the market to reverse to fill the other calendar(s). If you have a big position you might want to close 1/2 or 1/3 to minimise the risk the market moves sharply after you get you first fill.

It also depends how directional your position overall is nad whether you have a view on that. Say you are overall long delta and worried about a pull back then you might want to close the calendar with the highest long delta first.

hope that helps.

m.

[tjlocke99]

I would actually do the opposite - close the 820. You goal is to keep the underlying under the tent as much as possible. So if you had 820/840 for example and the stock moved from 828 to 845, what would you do? Move the tent, by closing the 820 and opening the 860. Your current P/L is irrelevant - the only question is what is the position you want to own NOW? 820 provides some downside protection but very little theta which is the main goal of those trades.

Thanks Kim and Marco!

I was also considering just holding all three spreads in the triple calendar another day, however with RUT back up I am too close to the 860 again. Kim if I close the 820 then I take that loss and if there is a pull back then I have less protection. That is why I was thinking of closing the 840 and then closing the other spreads when RUT moved closer to 820 or 860. I wasn't sure if there was a best practice on this though.

Right now if I close all 3 I am sitting at around break even after commissions.

Kim or Marco would you still recommend closing the 820? Right now that is looking at 25 to 30% loss but the unrealized gains on the 840 calls are evaporating now as well.

[tjlocke99]

well IB (not sure about other brokers) only lets you trade combos with 4 legs. However I think even if you could enter 6 legs I would try to close them one by one (each calendar). As usually you should get better fills. Spreads, if they cant be filled by lifting/hitting all offers/bid on the individual legs will go to a spread order book and then you have to find a MM who wants to trade your 4 legged combo - the odds (or rather spreads) are better you'll find someone willing to take the other side if you have only 2 legs.

I'd stick in all of them at mid and when the market moves one will be filled and then you get more agressive on the other offers or if you don't mind the directional risk (I would) then you can wait around a little longer and wait for the market to reverse to fill the other calendar(s). If you have a big position you might want to close 1/2 or 1/3 to minimise the risk the market moves sharply after you get you first fill.

It also depends how directional your position overall is nad whether you have a view on that. Say you are overall long delta and worried about a pull back then you might want to close the calendar with the highest long delta first.

hope that helps.

m.

Thanks Marco. When you say highest long delta do you mean the highest long absolute value delta? I currently don't have other positions other than long stock positions and an aapl bull call spread.

[Kim]

Thanks Kim and Marco!

I was also considering just holding all three spreads in the triple calendar another day, however with RUT back up I am too close to the 860 again. Kim if I close the 820 then I take that loss and if there is a pull back then I have less protection. That is why I was thinking of closing the 840 and then closing the other spreads when RUT moved closer to 820 or 860. I wasn't sure if there was a best practice on this though.

Right now if I close all 3 I am sitting at around break even after commissions.

Kim or Marco would you still recommend closing the 820? Right now that is looking at 25 to 30% loss but the unrealized gains on the 840 calls are evaporating now as well.

Whenever you take a loss or not is irrelevant. What is relevant is what position you want to own now. Would you open it as a new position? If you want some downside protection, then keep the 820. But 840 and 860 provide you the best theta, and this is the most important thing with those trades.

[Marco]

Thanks Marco. When you say highest long delta do you mean the highest long absolute value delta? I currently don't have other positions other than long stock positions and an aapl bull call spread.

Kim's advice was more specific on that trade mine more general. If you use IB you can use risk manager (other brokers may have similar tools where you can see the greeks of your position) drill down into the legs of the trade to see the delta of each leg. There you see which legs give you long or short delta exposure and adjust you position if needed. (for example closing the 820 Calendar as kim suggested will remove short delta exposure so you'll get longer delta)