Seeking Alpha
Profile| Send Message|
( followers)  

My investment strategy for trading calendar options is to collect premiums from selling calendar spreads on far out-of-the-money (OTM) options that are statistically unlikely to expire in-the-money (ITM).

My criteria for selection are as follows:

  • Spreads must be made as the premium receiver or spread seller
  • Calendar options must expire in sequential months
  • Strike price must be set at or outside of the 2.5σ / 98.8% confidence interval
  • Max potential return on margin must be greater than 4%

Additionally, by trading in options at strike prices that are at least 2.5σ away from their recently traded prices, this strategy also attempts to exploit the long-observed volatility smile pattern. After the 1987 stock market crash, OTM options traded at higher implied volatility than ITM options, which makes them relatively more expensive. Since I am a seller not a buyer of these options, I will profit more over time from selling far OTM vs. ITM options.

As shown in the charts below, strike prices for Union Pacific (NYSE:UNP), Whole Foods Market (NASDAQ:WFM), Hess (NYSE:HES), Anadarko Petroleum (NYSE:APC) and Abercrombie & Fitch (NYSE:ANF) all fall at or outside of the 2.5σ / 98.8% confidence interval. The gray lines are Bollinger Bands, which are based on a trailing 60 trading days and a 2.5σ range.

Option Strategy Details:

Union Pacific Corp

  • Spread: Short calendar put spread at $75 strike price
  • Effective Exposure: Long UNP
  • Months: Long Jan and short Feb
  • Premium Received (at midquote; exclusive of trading costs): $0.39 per option ($39 for entire contract)
  • Margin Required: $797.40
  • Max Potential Return: 4.89%

Whole Foods Market

  • Spread: Short calendar call spread at $80 strike price
  • Effective Exposure: Short WFM
  • Months: Long Jan and short Feb
  • Premium Received (at midquote; exclusive of trading costs): $0.43 per option ($43 for entire contract)
  • Margin Required: $691.30
  • Max Potential Return: 6.22%

Hess Corp

  • Spread: Short calendar put spread at $40 strike price
  • Effective Exposure: Long HES
  • Months: Long Jan and short Feb
  • Premium Received (at midquote; exclusive of trading costs): $0.40 per option ($40 for entire contract)
  • Margin Required: $441.90
  • Max Potential Return: 9.05%

Anadarko Petroleum Corp

  • Spread: Short calendar put spread at $55 strike price
  • Effective Exposure: Long APC
  • Months: Long Jan and short Feb
  • Premium Received (at midquote; exclusive of trading costs): $0.58 per option ($58 for entire contract)
  • Margin Required: $604.40
  • Max Potential Return: 9.60%

Abercrombie & Fitch Co.

  • Spread: Short calendar put spread at $35 strike price
  • Effective Exposure: Long ANF
  • Months: Long Jan and short Feb
  • Premium Received (at midquote; exclusive of trading costs): $0.46 per option ($46 for entire contract)
  • Margin Required: $391.90
  • Max Potential Return: 11.74%

Disclaimer: Please consult your financial advisor before making investment decisions. Depending on your circumstances and risk tolerance, the strategy in this article may not be suitable for all investors.

Source: 5 Stocks With Attractive Calendar Option Spreads