By the way... the thinkorswim platform also has some nifty capabilities for analyzing calendar spreads and projecting future roll values.
When position sizing for this type of trade, I always use my maximum loss to determine the number of contracts to trade. It is rare that I loose the full cost of the calendar spread simply because of the way it is constructed, but I have had it happen a few times. I'll discuss some early exit signs in 'trade exits' to help preserve some of the value in the trade.
In considering the above trade, the cost to enter the trade is $.47 and I was willing to risk $1000 on this trade, I could calculate my position size as: $1000/(.47*100) = 21 contracts.
Many brokers require approval for level 3 trading authority, which allows right to trade spreads. Before you begin trading spreads, you may want to check with your broker to make sure you are approved.
Most options brokers support placing this order simultaneously. While you can place this as two separate orders, I don't recommend it. Too much can happen between the two orders that affect the net credit you receive.
Some online brokers designate opening orders differently than closing orders. Let's say using the above chart, I want to sell the March 28 put and simultaneously buy the May 28 put. I might place the combination spread order as 'buy to open 1 contract of the May QQQQ 28 put and simultaneously sell to open 1 contract of the March QQQQ 28 put for a net debit of $.88'. With this combination order, either both get filled or neither get filled.
To realize a profit, I will have to place some kind of closing trade. In the most ideal case, my QQQQ March 28 put expires near 28 but worthless leaving me long a May 28 put. I could probably close the trade with a profit and be done, or I could sell the April 28 put, creating a 1 month calendar.
Realistically, I won't wait for the option to expire. From a trade management perspective, here are what I monitor for.
Some brokers require you to specify the type of order being placed (opening or closing) so it is important to realize what is going on with the two legs of the calendar spread. If I want to close my position completely, I may specify the order as 'buy to close QQQQ March 28 put, sell to close QQQQ May 28 put for a net credit of $...'.
If I am rolling my position from March to April, I may have to specify the order as 'buy to close QQQQ March 28 put, sell to OPEN QQQQ April 28 put for a credit of $...'.
The calendar spread is a more complex strategy than many of the those I've discussed. However, it makes a nice compliment to a my overall trades. While it is complex, it can also be a really nice income generator. It also compliments other positions, such as the short vertical spread because it actually benefits from volatility.
Notice that as I've discussed the various steps to trading the calendar spread, I've followed a fairly structured approach (selecting the right stock, timing the entry, selecting the right options, entry, exit, etc). These are based on a set of trading rules I follow, which are part of an overall option trading system I follow. This is a critical aspect of successful options trading. I've found I can't be successful trading any strategy just by knowing the mechanics. Having a system that defines what I do every time I trade is what helps me be consistent in my profits.
Note: Be sure to check out the Calendar Spread Tutorials on my Youtube channel.
|Outlook:||Medium term bullish to neutral (call calendar) - Medium
term bearish to neutral (put calendar)
|Max profit:||Difficult to calculate
|Max Loss:||Initial debit of the spread|
|Net Position:||Neutral - not really long or short|
|Time decay effect:||Works in your favor
|Volatility effect:||Benefits from an increase in volatility|