What's a Featured Trade? Each month I enter and track - publicly - a real money trade that is typical to my trading style. Readers have commented that it's very useful to see how a trade is entered, managed and exited through it's life-cycle. Since most of my trades are delta neutral (or mostly) option spreads, that's typically what you'll see. Hopefully these are useful to those of you learning to trade options - and particularly those who trade options for consistent monthly income.
This month I am bringing back the triple calendar, similar to last month. I entered this morning at 490/520/550. Why a calendar? As I mentioned in previous posts, calendars are long Vega trades. In other words, they benefit when implied volatility increases. I don't have any better crystal ball than the next guy, but RVX - the index tracking implied volatility of RUT - is at a six month low. Could it go lower? Sure. I'm just thinking it won't go too much lower, at least not too fast.
Meanwhile calendars also benefit from time decay, or positive Theta. So if volatility stays in my zone I win through time decay. If it increases, I win through time decay AND IV. If volatility decreases I can still win through time decay as long as it doesn't decrease too fast. There was a perfect example of this in last month's featured trade, where IV dropped substantially, but we still came out with a 9% profit on the month.
The biggest risk that I have with a Calendar, aside from plummeting volatility, is DELTA risk... or price movement risk. This is a relatively delta neutral trade when initiated (delta=6.8 right now), but if price moves too far we can lose. For that reason I chose to put on a triple calendar, sometimes called a "shotgun calendar".
Good Trading...
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