RUT Calendar 5-11

The Calendar trade we are featuring this month is going just fine. Currently the profit picture looks great, and we have lots of room for price to move in both directions. Today was another "do nothing" day... just the way we like them.

Today the RUT landed at $501.94 and our center strike is $500... almost dead center. Deltas are 2... that's it, just 2. One of the great things about calendars is that they tend to not react too harshly to market movement. This is the case here. Sadly, this means there isn't much to do, and therefore little to report.


In light of the simple management I thought I'd share my overall plan for this trade with you. I hinted at some of the plans in my opening post, but let me give you the big picture. As with any trade, before I start I have to create a plan based on my past experience with calendars. Specifically, I like my plan to tell me at least three things: First, what is my profit target? Second, what is my maximum loss? Third, what are my adjustment plans, if there are any?


Profit: My profit plans are pretty easy for calendars. Generally I look for 15% when I do a triple calendar, and 20% for a double. These numbers are based on my experience trading calendars, and I just know that they are reasonable. It's possible to get a higher yield, but it's also possible to turn a nice gain into a loss. 15% is plenty in this case.


Loss: My max loss for the calendar is 25%. Again, this is based on a time tested pattern. I am will to lose a little more than I gain, because I have many more winners than losers. BUT I don't want to let it get out of hand and lose many months of profits in a few days. That's just bad money management. 25% is reasonable to me and allows me plenty of trade management options.


Adjustments: If things don't go well with a calendar, what should I do? And how do I decide that they're not going well? There are many answers to this and each option has merit. There is no single best answer, as there are trade-offs. Usually it has something to do with one's tolerance for pain. My rules are based on lots of testing, both with historical data and with real money trading. My adjustments are simple:

• If the price the strike of one of the outside calendars, I will take the furthest strike down and move it to the opposite side. In this case I have on a 460/500/540, so if the price goes to 540, I will remove the 460 and move it to something like 580. This re-centers the overall trade. Exactly where I move it will be determined at the time.


• I will keep rolling in this fashion until somewhere between 4 and 10 days from expiration, or until I hit my profit or loss targets.

Simple, eh? That's the way it should be. There are many variations to all of these rules, and each with its own set of trade-off. The setup and plan seems to suit my style. It tends to be wide enough that management is minimal, and yet still turns in a nice yield when properly managed.