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I am by no means a perfect option trader in this PITA of a market, but I have noticed that the volatility is very high! Using options to mitigate the risk is what playing is about, and I have implemented a Calendar strategy that seems to be working quite nicely over the past few months with the volatility so high. First, though, there are a few terms needed to understand the strategy:
Delta – Delta is a measure of the change in an option’s price (premium of an option) resulting from a change in the underlying security (i.e. stock) or commodity (i.e. futures contract). The value of delta ranges from -100 to 0 for puts and 0 to 100 for calls (here delta has been multiplied by 100 to shift the decimal).
Theta – Theta is not used much by traders, but it is an important conceptual dimension. Theta measures the rate of decline of time-premium resulting from the passage of time. In other words, an option premium that is not intrinsic value will decline at an increasing rate as expiration nears.
Also, one needs to use technical analysis in their use of the calendars, as the trend is your friend, and fighting it can be bad. I encourage all to read the TA handbook at the top of the PSW site.
SPY and USO have been trading in a very large, but predictable range since August. Using these charts, I have been playing the volatility by implementing a calendar in each direction (modified condor) to take advantage of the theta decay. My bias is towards to the down side, but I usually buy/sell OTM calls and puts.
On Friday before the close, I have initiated a Calendar Spread/Condor on SPY and/or USO, where I am picking options with a delta of ~0.3X and selling the corresponding weekly ones with a delta that is usually 0.05 or so below that of the long dated option. This strategy gives us two directions to play, and if the market moves quickly in one direction or another, we can benefit from the theta decay of the short call and/or put.
With the long dated option, we…
