I am a big fan of calendar spreads. This strategy offers a quite good Risk reward and some quite good set ups can be made, even combining 2 or 3 calendars on the same underlying.
I am getting the feel of trading double calendars for company earnings due to the high volatility and the high premiums, closing the trade before the earnings and capitalizing on theta decay for short leg and IV raise in the long leg.
As earnings season is coming to an end, I was thinking of the following strategy to keep generating cash flow: directional SPY calendars (inspired by u/breakyourteethnow)
It is a "slightly directional" trade that consist of understanding amrket sentiment trying to predict market direction every Monday morning / previous Friday afternoon.
For instance, let's say that my thesis is that SPY may pull back this week (e.g. rate cut was already priced in, previous market highs may act as a resistance, volume is drying and candle spreads are going narrow and the IV drop has finished so far).
Ok, I got my thesis. Now it's time to select the strike. I will now go to the option chain and see what is the option's market sentiment. And let's say that what I see is higher volume on the puts than in the calls. I also see that there is a big OI on 557 strike (SPY is currently trading at 561).
Then, I have my trade now: Call calendar spread on the 557 strike (short call with weekly expiration, long call expiring one week after):
https://optionstrat.com/build/calendar-call-spread/SPY/-.SPY240830C557,.SPY240906C557
On the upside, breakeven is a bit closer than the expected move, but if our thesis is correct, we have a max profit potential of 100-130%. We lose money if, at expiration, stock rises above 1% or drops more than 1.8%.
Depending on time to monitor the market and risk aversion, a SL may be recommended. For these trades, and considering that SPY is not a volatile instrument and spreads are pretty narrow, in my case I like to have a 50% SL.
Looking forward to get sh*gged and roasted by fellow traders!
Posted by Comfortable-Entry341