When some brokerages calculate margin on complex option spreads, they don't allow for the fact that it's impossible for an out-of-the-money bull put spread and an OTM bear call spread on the same underlying both to expire at maximum loss—so they withhold margin on both spreads independently. Options-centric brokers (like the ones who autotrade our newsletters) don't require double margin on a balanced iron condor or butterfly (i.e., where the vertical spreads are equal and all contracts have the same expiration date)…but thanks to a regulatory crack-down in the wake of the 2008 credit crisis, it's increasingly likely that any deviation from a balanced iron condor or butterfly will cost you margin on both sides…
Last month we faced what just might be the worst possible scenario for a calendar-spread strategy—a v-shaped bottom late in the cycle. And yet our trading rules not only kept us from a loss, but produced a significant profit that handily outperformed the market.
Performance Comparison
S&P 500: –0.20%
Dow Jones Industrials: –1.19%
Russell 2000: –2.64%
S&P 500 Covered Call Fund: +6.92%
Calendar Options: +2.52%
Note: The period measured is from expiration to expiration.
We calculate Calendar…
(Note: The following is adapted from a two-part series on managing volatility risk, originally published on the Calendar Options members blog. Calendar Options subscribers have access to the full version, as well as Part II, “Putting the Double-Diagonal to Work”.)
Much like an iron condor combines two directional trades into a neutral one, a double-diagonal marries a bull put diagonal and a bear call diagonal to form a hybrid between an iron condor and a calendar spread.…
To the right is a fun little trade called the Straddle Strangle Swap. Look familiar? It looks a lot like a simple calendar spread or a butterfly spread. In actuality it is both, making it what I consider a sort of super calendar spread. Now lets take a look at how to construct these and what qualities make them so super.
Straddle Strangle Swaps are a specific type of Double Diagonal. They involve selling a front month straddle and…
Thursday, June 24, 2010
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