Spread is the difference between buying and selling for the same thing. A future on a ruble costs 81 rubles and at the same time 79 rubles. This is a spread. In general, I will not be stupid, but I will start about options. Our options are quarterly with repayment every month. The specification is described on the exchange. And here there are some inefficiencies that can be exploited. Each option series has its own volatility. Options of different series have their own properties. And these properties correspond to BS. There are tempting ideas to use these properties. I will try to explain this with examples using fingers and pictures.

We will consider a spread in the form of a cat. Bought strandangle distant and sold near. But let's start in order. This strategy is also called the option firebox. We balance between a larger theta of the near strangle and neutralize the vega of the far series. Imagine a domestic situation. You need to cook soup, or smelt TNT from a World War II bomb. For work on the stock exchange, the second is closer in essence. You take a large pot with some water and put it on the fire.

On the fingers, it looks like a raised fist with the index and little fingers sticking out. Horned goat. Just need more fingers. I have four strikes in between. The main property of this pan is that water evaporates from it slowly. Theta at 130 rubles. But the change in volatility has a stronger effect. True, it does not jump very much on long options, but we will keep this in mind.

Now we will put our bomb in our pot, in the form of a sold strandangle. Well, I won’t explain to you that this is a real bomb.

On the fingers it is a goat, only the muzzle down. And now we bring these goats together. It turns out a cat, or a tiger, who is friends with a goat.

Please note that the options are balanced for zero Vega. That is, we must receive Theta without risking that the volatility will change. GO is one position less than just selling a strangle. The delta is flat, the edges are distant, in general a risk-free position. And if you show it to a sapper who smelts TNT from a bomb, he will show you a goat, only with the middle finger. Naturally, the position must be controlled.

What can happen to us? If the market calms down and the neighbors' ox goes down, Vega will begin to boil. You can add near options. If the outrage continues, then you can add a spark. Buy more distant, saucepan, options. Here it is necessary to look at liquidity. It's like cooking over a fire. Do not throw all the firewood at once and do not pour all the water into the pot, but balance.

Then my advice ends. Here I can not explain how a good cook differs from a very good one. I feel the taste, but I don’t understand the chef’s appearance. So is trading. I showed you the pot, showed you the stredlicks and the stredlicks, let's cook. And if you have perseverance and obsession, then everything will work out. You'll cook strangles like scrambled eggs for breakfast. And no iron, all natural. I wish you all good luck. There will be questions, write.

PS Special thanks to our Sberbank and personally German Gref for the fact that we have them. Otherwise, I would have to show examples on Goldman and Sachs options.

Option (future) strategies can be conditionally divided into simple strategies (working with one option) and working with spreads, where there are 2 or more options.

The concept of "spread" is one of the main terms for forecasting the currency market. This is the difference between the buying price and the selling price of futures. The purchase price is called Ask . The selling price is called Bid .

Spreads are divided into:

1. calendar (time) spread;
2. vertical spread.

Calendar spread (Time spread) (see Figure 1) - a trading method with options to buy (buy) and sell (sell), in which an option with a shorter expiration date is sold (put), and an option with a longer expiration date is bought (call ).

A short option expires faster than a long option because the short option has a closer expiration date than the long option.

A calendar spread differs significantly from a vertical spread, where a short-term option ( put ) and a long-term option ( call ) are purchased simultaneously.

Calendar spreads are divided into 2 groups:

1. horizontal;
2. diagonal.

The horizontal calendar spread deals with the buying and selling of options with the same price but different expiration dates. With a diagonal calendar spread, prices and expiration dates are different.

Calendar spreads can be further divided into:

• short;
• long.

Short calendar spreads are when short-term options are bought and long-term options are sold. Long calendar spreads - long-term are bought, short-term are sold.

Calendar spreads depend on market volatility, at their core, it is an exchange of volatilities. Using a long spread will bring profit when the volatility rises, on a short spread it will be possible to earn when the implied volatility falls.

Volatility is the change in price from high to low over a certain period of time.

Read more about this here:

The danger of calendar spreads lies in the difficulty of predicting volatility. An increase or small fluctuations in volatility will be favorable. A position is created when implied volatility is already high. The risk is offset by the short-term nature of this strategy on the currency exchange.

Use in trade

Trading calendar spreads is carried out as follows.

With a horizontal spread, a trader acquires, for example, 5 options to purchase the company's shares with an exercise price of 50 c.u. and due in August for $4, and simultaneously sells 5 options to purchase the company's shares with an exercise price of $50. and due in July for 2 c.u.

The difference per share is 2 (4-2). The trader will make a profit if the share price is more than 52 USD. plus exchange fees. With a diagonal spread with the same conditions, but selling options with a strike price of 45 USD, in order to make a profit, the share price must be greater than 57 USD. plus exchange fees. Traders use these strategies to "play the ascending or descending line". It is assumed that the purchased option will increase in price. Only when the price of purchased shares rises can you make a profit.

To understand how much you can earn on the calendar spread of futures, you need to remember that profits and risks are obtained due to the difference between the bought and sold futures, minus the exchange fee. The most important strategy is the desire to buy low and sell high.

Conclusion

The calendar spread is characterized by increased risks for the trader's long-term manipulations. It is used, as a rule, by experienced traders, and with a competent approach to business, the calendar spread makes a profit.

The Calendar Spread is also called the Time Spread because, from a theoretical point of view, it attempts to take the difference (to spread) from the time, and not from the price (although the price is also a factor in the behavior of this Spread). The Calendar Spread of stock options consists of buying an option expiring in a certain future month and selling an option with the same strike price expiring in a later month. For example, if the current month is April, then buying the IBM-July 80 call and selling the 1BM-May 80 call would be the Calendar Spread. As time passes and the May expiration approaches, the temporary decline in the value of securities will begin to put more pressure on the May 80 call (which is short) than it is on the July call (which is long). When this happens, this Spread will make money if the underlying asset is close to the strike price.

Calendar Spreads are sometimes referred to as Horizontal Spreads to reflect the fact that the Spread spans different expiry months, as opposed to Vertical Spreads where the Spread spans different strikes.

A real spread trader (spreader) will close this position at the time of the May expiration or before, because he is interested in the characteristics of the Spread itself - it will expand if the underlying asset remains near the strike price, and narrow if the underlying asset moves too far from the strike price . The profitability of the Calendar Spread at the nearer expiration is shown in Figure 2.15. The Spread has limited profit potential and limited risk, and is limited to the amount originally paid for that Spread (in this it is similar to the Vertical Spreads described earlier).

A more aggressive approach is to continue holding long call options after the short options have expired. However, we do not recommend this approach to the Calendar Spread strategy.

One of the biggest differences between stock (or index) options and futures options is that futures options don't necessarily have expiration months directly related. Therefore, you must be careful when creating Calendar Spreads with futures contracts. For example, you may have options on March and June futures for the Swiss franc. If you buy the June option and sell the March option, you don't necessarily get a Calendar Spread in the same sense as we had in the IBM example. The reason is that the underlying of your two Swiss Franc options are two different futures contracts, the June contract and the March contract, while in the IBM example, IBM stock is the underlying asset for both Calendar Spread options.

The statement that the March Swiss franc futures and the June Swiss franc futures are related to each other is true, but they do not necessarily move.

Figure 2.15 CALENDAR SPREAD

together. In fact, for some futures - especially those whose underlying asset is real commodities - grain or oil - the calendar spread between two futures contracts can fluctuate very much. This fluctuation of the Spread will cause the corresponding options to behave in a way that does not occur in Calendar Spreads for stocks or indices. This fluctuation can even cause the value of the options to invert to the point where the option with the nearer expiration date sells for a higher price than the remote one. The following example may be helpful.

Example. Let's say it's February and you notice that options on the March Swiss franc (5P) are more expensive than options on the June franc. Therefore, you want to create a Calendar Spread. Prices may be as follows:

June-79-call: 2.00

Your first desire is to try to create a Calendar Spread by buying the June 78 call and selling the March 78 call. However, even though the strikes of the call options are the same, the 78.00 March call is one pip out of the money, while the June call is near the money. This increases the debit you have to pay initially for the Spread and effectively makes it a bullish position. A more neutral Calendar Spread would be to use call options. At the initial moment of time, they are “out of the money” at the same distance: buy the June-79 call and sell the March-78 call. Both options are out of the money by one pip.

However, even in this case, the spreader is subject to the vicissitudes of the relative movements of the March and June 5E futures. For example, if interest rates in the United States or Switzerland change, the price differential between the two futures contracts will certainly change as well.

Currency futures have serial options. So there should be SF options expiring in April and May. Moreover, the actual futures contract - the base for these serial options - is the June futures contract. Thus, a real Calendar Spread can be created by buying the June BR call and selling the April or Maft SF call. In this case, the only variable in the Option Spread will be time, since the same contract, the June Swiss Franc futures contract, is the underlying for both options.

Calendar call spread
Call calendar spread refers to one of the types of calendar spreads. The other two types are the Calendar Put Spread and the Proportional Calendar Spread. At its core, the Calendar Call Spread is a neutral/bullish strategy. And in some ways, this strategy resembles a selling strategy, but is more profitable if the price of the underlying asset remains the same or slightly increases. We can say that the Calendar Call Spread is a modified strategy of covered Call option selling. The modification consists in the fact that instead of the underlying asset, an option with a very long expiration date - LEAP is used here. Therefore, this strategy requires less cost to create it. And the meaning of this strategy remains the same as that of a covered sale - obtaining the time value of the sold options. Since the time decay of short-term options is faster than long-term options.

Since the Call Calendar Spread contains long term options bought that are more expensive than near term sold options, there is a cost to creating this spread, i.e. this spread is a debit spread.

There are two ways to build a calendar call spread. First, you buy and write options with different expiration dates and different strikes. In this case, you will get the Diagonal Spread. Another way is to buy and sell options with different expiration dates, but with the same strikes. Then you will get the Horizontal Spread. Both spreads will be discussed in more detail below. Since both spreads are calendar call spreads, in order to distinguish between them, I will use the mentioned names: Diagonal Spread and Horizontal Spread.

When can this strategy be used?
The use of this strategy may be appropriate when the price of the underlying asset is expected to remain unchanged or slightly increase.

How exactly to build this strategy?

Diagonal spread
To build this strategy, you must buy a Call option in money(ITM) with a long expiration date and immediately sell the option on money(ATM) or out of money(OTM) with the nearest due date.
For example:

BUY +10 QQQQ 100 (Quarterlys) JUN5 10 35 CALL @8.15 LMT

Why did we buy the option in money(ITM), not on money(ATM) or out of money(OTM)? The point is that the purchased option in money has a larger delta than the delta of the sold near-term option. Thus, this guarantees us that in the event of an increase in the price of the underlying asset, our purchased option will add in value faster than the sold one.

Horizontal spread
To implement this strategy, you must buy a Call option on money(ATM) with a long expiration date and sell a Call option on money(ATM) with the nearest due date.
For example:

BUY +10 QQQQ 100 (Quarterlys) JUN5 10 42 CALL @3.56 LMT

In this case, creating a calendar spread will cost less than building a diagonal spread. Therefore, with the same costs for this or that strategy, this strategy will have the best return in percentage on invested funds.
The disadvantage of the Horizontal Spread strategy is that if the price of the underlying asset moves well up, you can incur losses, unlike using the Diagonal Spread. This is due to the fact that the short-term written option on money has a larger delta than the purchased option on money with a long deadline. And if so, then you will lose more on a short option than earn on a long one. Therefore, the Horizontal spread strategy must be used with full confidence that the price of the underlying asset will fluctuate at a certain level.

Potential Profit of Calendar Call Spread

Diagonal spread

In the event that at the time of expiration the price of the underlying asset is at or slightly below the strike level of the sold option, then the short option will expire worthless. Thus, you will keep the entire profit from the sale for yourself. If by the expiration time of the short option the price of the underlying asset is higher than the strike of the near-term option and continues to rise, then you will also make a profit. Since the purchased option will add in value faster than the sold one, due to the larger delta. You can get the maximum profit if the price of the underlying asset at the time of expiration of the short option is exactly equal to the strike of the sold option.

Horizontal spread

The horizontal call spread will make a profit if the price of the underlying asset at the time of expiration of the sold option is at or slightly above the strike level of the short option. The difference between the Horizontal spread and the Diagonal spread is that if the price of the underlying asset rises higher, the latter will remain profitable. (Remember the delta). While the Horizontal spread can bring a loss in case of a significant increase in the price of the underlying asset.

The horizontal spread will bring the maximum profit if the price of the underlying asset is exactly equal to the strike of the short option at the time of its expiration.

The maximum losses for both spreads are limited and equal to the cost of creating the spread.

In many of my articles, where attention is paid to a particular strategy, I wrote that position regulation when trading options is a necessary component of a successful existence in the market. This also applies to the use of the strategy of calendar spreads and their types. In my blog, I have already posted a video on how you can adjust the position of the calendar spread. This video can be viewed. In short, the meaning was as follows: you buy a calendar spread and, when the stock moves in one direction or another, add another calendar spread or close half of the current position and open a new calendar spread with the same number of contracts on other strikes. Such a strategy, in principle, justifies itself if the movement of the underlying asset occurs around one level without sharp movements in any direction. If there is a sharp movement of the underlying asset in any direction, even with a subsequent rollback to current levels, then this calendar spread management tactic may no longer be acceptable. Since it leads to unnecessary actions and an increase in commission costs, as it was, for example,. And if the underlying asset continues to move in one direction, then holding the position without applying any protective actions will simply lead to a loss. I spent the past weekend at the computer, backtesting the calendar spread strategy and then adjusting it as the underlying asset (in this case, SPY) moves in one direction or another. I was prompted to take these actions by a recent post by my friend Dan. Which just describes the tactics of regulating the double calendar spread. In my backtest, I practically used the same approach, but slightly modified.

The principle of the strategy is as follows: every month since the January 2009 option series, I bought a calendar spread, when SPY moved in one direction or another, I added another calendar spread, when SPY moved further, I rolled a short Put or Call option, depending on where I went the market is up or down. If the market was unfolding, and there was such a thing, then things are reversed by rolling.

The thinkorswim backtesting terminal has a special thinkback tab where you can build strategies in the past. BUT! The downside is that it shows option prices for each day at market close. In this regard, it was not always possible to make adjustments at the exact moment and at the prices that I needed. For example, if the market opened at level 97 and closed at level 99, I would adjust at level 98. Another disadvantage of the program is the inability to display a graphical position profile based on historical data. Therefore, it cannot be 100% sure that this approach will show the same result in real trading. It can be both worse and better.

Now to the test itself. The first deal was made in December 2008: the January calendar spread was bought, that is, January options were sold and February options were bought. Each position is fully closed every Thursday before the expiration Friday. And a new calendar spread was opened with the following months after this Friday - on Monday. The number of contracts has always been the same, practically for the same amount. That is, without reinvestment. For convenience, I took the initial amount of $1000. Regulation each time took place, one might say, at strictly specified points or market conditions. (Why “you can say” because of the lack of a program, see above). At the same time, regulation was also always carried out by the same number of contracts. The last deal was closed in December 2009.

Despite the fact that in 2009 there was basically an upward trend, still during each individual month (here we mean the period of time from expiration to expiration) The market behaved differently. It grew in a month, and fell, and at first it grew, then it fell and vice versa. The only month when almost no adjustments were made is the last month. On the other hand, the whole year there was a drop in volatility, which does not have the best effect on the calendar spread.

Now the yield chart itself:

As can be seen from the chart in February and April, the commission was larger than the profit. July generally showed negative returns. But the greatest profit was shown in January, March (when, by the way, the market showed a minimum and rose back), June, November and December. In December, we didn’t even have to practically adjust the position, as there was a flat. That is, in those months where the market moved up or down with reverse rollbacks, the strategy performs better. There was no trading in October as the calendar spread was not available at the then current price levels.

In my opinion, this approach to trading has the right to life. I don’t want to say that this is an ideal tactic, and most likely there is something to improve here, but I have determined the main vector for further development in options trading for myself.

The only thing left is to test this tactic in real trading. Of course, the best scenario is when there is no need to regulate anything at all. But this rarely happens.

On Friday 02/19/10 I bought 2 March calendar spreads on SPY, if the market behaves “badly” I will use this tactic.

02/19/10 BOT +2 CALENDAR SPY 100 APR 10/MAR 10 110 CALL @.92 ISE

The results will be discussed separately. And most likely it will be a video report.