Because Calendar Options uses adjustments (vertical rolls) that split and recombine our positions, there are a few things that members who want to have their broker autotrade the strategy need to be aware of, in addition to our general autotrading terms and conditions. It is extremely important that you read the following notes and discuss them with your broker before electing to autotrade Calendar Options trade alerts:
- Unless you specify your lot size in multiples of four contracts (two contracts for trades opened as double-calendars) or a whole-number multiple of our base position (available from some brokers), you have a 50-50 chance of adjustments resulting in an unbalanced position. This has little effect on the profitability of the trade as long as the ratio is close to 1:1; however, it may affect autotrade execution. It is your responsibility to understand the Calendar Options strategy and your broker’s autotrading procedures, and to manage your allocation and autotrading arrangements accordingly.
- Some brokers may not automatically execute closing orders if you have an unbalanced position. Your broker might execute the smaller number of contracts and leave you with a one-contract position still open at one strike; or, they might choose not to execute our trade alert at all. It is imperative that you understand your broker’s terms for executing close-trade alerts on unbalanced positions; Calendar Options/Condor Options is not responsible for trades that are not executed.
- Any autotrading allocation specified in terms of a fixed number of contracts will result in certain positions getting larger dollar allocations than others. Specifically, a position opened with a double-calendar trade may be nearly twice as large as one that is initiated as a single-strike calendar spread. In addition, wider spreads (two- and three-month) cost substantially more per contract than one-month spreads. Disproportionate allocation among Calendar Options trades is likely to result in performance that significantly differs from our benchmark returns.
- Manual adjustments to an autotraded position may affect the ability of your broker to execute subsequent trade alerts for that position. You are responsible for the consequences of any actions you take that manually alter a position initiated by a Calendar Options trade alert.
- Adjustments typically are debit trades, and may result in a substantial increase in the dollar size of a position. Sometimes a single adjustment may require adding 30 or 40 percent more cash—and occasionally, though rarely, even more. You are responsible for considering the effect of adjustments when sizing your initial position, and for keeping sufficient cash available in your account for adjustments. Your autotrading broker will not execute a Calendar Options adjustment if you don’t have enough buying power.*
Autotrading provides a convenient way to mirror our trades, but we can’t stress enough how important it is to understand how your broker handles our trade alerts under all conditions that may arise. It’s also critical to understand that, more often than not, a Calendar Options position will increase, in dollar terms, over its lifetime. Although we can’t tell you how much you should allocate to any particular trade or strategy, we’re happy to explain the characteristics of Calendar Options positions and trades. Just contact us if you have any questions.
*In an effort to ensure that clients have sufficient buying power at all times, some brokers require a minimum of $5000 to autotrade Calendar Options. This requirement is at the broker’s discretion. and it is not intended as a recommendation for asset allocation. To find out whether this requirement applies to you, contact your broker’s autotrading customer support representative.
