Special Topic Option Strategies: Calendar Spreads Brian Houston, - - PowerPoint PPT Presentation

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Special Topic Option Strategies: Calendar Spreads Brian Houston, - - PowerPoint PPT Presentation

Special Topic Option Strategies: Calendar Spreads Brian Houston, Nison Cer0fied Trainer www.mycandlecharts.com www.candlecharts.com www.candlechartsacademy.com Risk Disclosure: The risk of loss trading securi0es, futures,


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Special Topic Option Strategies:

Calendar Spreads

Brian Houston, Nison Cer0fied Trainer™

www.mycandlecharts.com www.candlecharts.com www.candlechartsacademy.com

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Risk Disclosure: The risk of loss trading securi0es, futures, forex, and op0ons can be substan0al and is not for every investor. Individuals must consider all relevant risk factors including their own personal financial situa0on before trading. An investor could poten0ally lose all or more than the ini0al investment. Risk capital is money

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(CFTC) Rule 4.41 HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS. The informa0on, services, products, claims, and materials on our sites are provided “as is” and without warran0es of any kind, either expressed or implied. We disclaim all warran0es, expressed or implied, related to strategies and content provided on this site as well as those that are presented in our products and services. All courses, videos and services are licensed for individual noncommercial private use only and may not be resold nor redistributed in any manner. All sales are final and no refunds are offered. Every visitor to this site, and subscriber (or prospec0ve subscriber or customer) acknowledges and accepts the limita0ons of the services provided, and agrees, as a condi0on precedent to his/her/its access to our sites, to release and hold harmless Candlecharts.com, Candlechartsacademy.com and Mycandlecharts.com, its officers, directors, owners, employees and agents from any and all liability of any kind (including but not limited to his/her viewing and/or implementa0on of this sites’ content, emails, webinars, videos, subscrip0on to services and/or purchase of any trader training product or service herein). We encourage all traders to learn to trade in a simulated trading environment using a demo account only, where no risk may be incurred and to not risk live capital.

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Brian has been trading stocks for over 37 years, and has devoted much of his trading career to trading

  • ptions and creating options strategies.

During that time, he has used Steve Nison's candlestick patterns and education to continually improve his knowledge and skills. Recently, Brian has has also added Elliott Wave theory to his set of trading tools, CFDs in Forex, Indices and Gold.

Brian Houston,

Nison Cer0fied Trainer ™

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Which M Markets

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Yo Your Favourite Market

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TRA

RADER ER’S SLA LANG

  • Bull Market
  • Bear Market
  • Support
  • Resistance
  • Trend

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TRA

RADER ER’S SLA LANG

  • Windows – both rising and falling
  • Lagging Indicators!
  • Oscillator – MACD, Stochas0cs
  • Moving Averages
  • Candles and their colors

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SLIDE 8

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Leverage

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The Mul1plier Effect

Where a Nison candle signal confirms another indicator

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Option Calendar Spreads

  • So what do we do and why?
  • What is your market move expecta0on?
  • 3 Strategies –
  • In the Money (bearish market)
  • At the Money (neutral market)
  • Out of the Money (bullish market)
  • Do you see trends in the market?
  • What are the candles sugges0ng?

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Bulli Bullish sh Engu Engulfing P ing Patt atter ern at Su n at Suppor pport t

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Ho How N NOT t T to u

  • use candles

se candlestic ticks s

Oh my goodness! The market rallied after the shooting star!

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Option Calendar Spreads

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Option Calendar Spreads

  • LEAPS – Long dated op0ons
  • Balance price vs intrinsic value

Stock Price = $172.87 Minus Strike - 160.00 Intrinsic Value = $12.87 160 Strike = $28.00 Minus Intrinsic - 12.87 Time Premium = $15.13

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Option Calendar Spreads

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Option Calendar Spreads

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Option Calendar Spreads

  • LEAPS – Long dated op0ons
  • Balance price vs intrinsic value

Stock Price = $172.87 Minus Strike - 160.00 Intrinsic Value = $12.87 160 Strike = $28.00 Minus Intrinsic - 12.87 Time Premium = $15.13

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SLIDE 19

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Option Calendar Spreads

  • Buy LEAP Call for $28.00
  • In The Money (ITM)
  • Strike price of $160
  • Sell a closer to Expira0on Call with a higher Strike
  • May 15, or
  • June 19

May 175 = $4.00 LEAP cost $28.00 COST = $24.00 June 175 = $6.00 LEAP cost $24.00 COST = $18.00

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Decision Time

  • Decide which op0on you wish to sell
  • Is the market in an UP, DOWN or SIDEWAYS trend
  • How long un0l we resume our trend direc0on
  • Big Ques0on: ITM, ATM or OTM
  • In the Money
  • At the Money
  • Out of the Money
  • This all relates to the expected market direc0on within a

par0cular 0me period!

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SLIDE 21

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Option Calendar Spreads

May 175 = $4.00 LEAP cost $28.00 COST = $24.00 June 175 = $6.00 LEAP cost $24.00 COST = $18.00

  • 1st Ques0on –why did I reduce the June 175

Call price from $8 to $6?

  • 2nd Ques0on – is this exactly how it looks in

real life?

  • 3rd Ques0on – how do I make money and

when?

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Option Calendar Spreads

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Option Calendar Spreads

  • Over 0me your LEAP 0me premium will decay
  • The market is constantly moving – up, down and sideway!
  • Your LEAP will reflect this movement
  • Near the May Expiry of op0ons what happens?
  • CME moves up
  • May op0ons did not expire worthless
  • Prior to expira0on, ROLL your op0ons!
  • Buy back the May Calls and Sell further out!

May 175 = $4.00 LEAP cost $28.00 COST = $24.00 June 175 = $6.00 LEAP cost $24.00 COST = $18.00

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Rolling Out your Options - Example

  • Buy back May op0ons for $1 and SIMULTANEOUSLY sell Call

further out

  • Into June maybe and for what price?
  • More or the Same?
  • What is the market expected to do next?
  • ITM, ATM or OTM

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Rolling Out your Options - Example

  • May op0ons = $0 so you KEEP the $4 and they expire
  • Market has pulled back and therefore your LEAPS dropped
  • What is expected next as a Market move?
  • Are you at support?
  • As your May Op0ons expire, consider selling

another op0on if appropriate

  • ITM, ATM or OTM

May 175 = $4.00 LEAP cost $28.00 COST = $24.00 June 175 = $6.00 LEAP cost $24.00 COST = $18.00

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Option Calendar Spreads

  • What is your new LEAP value with a market increase of $10

May 175 = $10.00 LEAP cost $28.00 COST = $24.00 June 185 = $6.00 LEAP cost $24.00 COST = $18.00

  • CLOSE OUT = Sell LEAP for $36 – 24 – 10 = $2 PROFIT!
  • Your LEAP will reflect this movement
  • ROLL up and out your SHORT CALL
  • Pay $10 and receive back for JUNE $6
  • LEAP has increased in value, and STRIKE is $10 higher
  • I WANT CASH $$$
  • Roll up your LEAP by 1 or 2 Strike prices
  • How much can I add to my account?

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Option Calendar Spreads

  • Quick Summary

May 175 = $10.00 LEAP cost $28.00 COST = $24.00 June 185 = $6.00 LEAP cost $24.00 COST = $18.00

  • Roll up and out your SHORT CALL
  • Cost $10 – SHORT JUN 185 $6 = -$4
  • ROLL up LEAP CALL
  • Sell for $36 and Buy 2 Strikes higher = $28
  • Profit = $8
  • Net Account Increase of

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Summary

  • The trade has lasted less than 1 month
  • Net into your account of $4
  • Your ini0al cost out of your account was $24
  • S0ll own LEAPS
  • Market is Trending upwards (check Moving Averages)
  • And you have how much ROI?

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Added Tips

  • The BUY – WRITE or Calendar Spreads works amazingly well in

rela0vely flat markets with repea0ng paterns

  • You keep reducing your cost while you wait for the market to

move

  • If the market is trending upwards
  • Keep selling closer expira0ons OTM – OUT OF THE MONEY
  • p0ons
  • Hopefully they expire worthless
  • If your LEAPS are called, you should have reduced your cost

nicely and s0ll generate a profit

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SLIDE 30

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Option Calendar Spreads

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Option Calendar Spreads

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SLIDE 33

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Option Calendar Spreads

GM = $24.00 LEAPS What is your Time Premium Jan ’21 $15 + $10 – 24 = $1.00 Jan ’21 $18 + 7.70 – 24 = $1.70 Jan ‘22 $15 + 11.25 – 24 = $2.25 Jan ’22 $18 + 9.20 – 24 = $3.20 What is your Market Trend? Jun $22 + $2.85 – 24 = $0.85 Jun $23 + 2.20 – 24 = $1.20 Jun $24 All Premium = $1.62 Jun $25 All Premium = $1.10

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Option Calendar Spreads

  • So what do we do and why?
  • What is your market move expecta0on?
  • 3 Strategies –
  • In the Money (bearish market)
  • At the Money (neutral market)
  • Out of the Money (bullish market)
  • Do you see trends in the market?
  • What are the candles sugges0ng?

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Calendar Trade Risk

  • Risk – simply the NET amount of money you have in the trade
  • PROVIDED you have sold the shorter dated calls at least as high

as your Long Call Strike price

  • Jan ‘22 $15 @ 11.25 MINUS Jun $23 @ 2.20 = $9.05
  • Premium on Jan ‘22 $15 = $2.25, sold Jun $23 $2.20
  • What is your 0me decay on the $2.25?
  • Remember your 45 day to expiry!
  • How many 1 month op0on contracts can you sell (over 0me)?

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Option Calendar Spreads

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Rolling Mid-Month

  • We see GM stock drop to a nice support area but we s0ll have 0me

before our op0ons expire

  • What do we do?
  • Why not buy back your op0ons!
  • Jun $23 $2.20 which now have a week or so remaining
  • Stock Dropped!! So our value has dropped!
  • Expected buy back at $0.50 to $0.75
  • Profit to date of $2.20 – 0.75 = $1.45
  • Your LEAP now starts to increase with the market rise and you can

roll out your close dated op0on as and when the signals are present

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Option Calendar Spreads

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Calendar Spreads - PUTS

  • This works exactly the same with PUTS
  • Buy a longer dated (LEAP), ITM of a PUT
  • Sell a closer dated expira0on month PUT
  • Ideally OTM
  • If the market con0nues dropping, con0nue rolling out your

close dated op0ons

  • Roll out the LEAPS if you wish for some realised gain / cash
  • Close the en0re trade when you find solid support
  • You will have benefited from 0me premiums

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Quick Summary

  • Calendar Spreads
  • Buy your LEAP a couple of strikes (or more) ITM
  • Sell close dated op0ons (same type CALL / PUT)
  • Done simultaneously
  • Will depend upon expected market movement next BUT
  • Usually just OTM / ATM
  • Take advantage of Time Premium decay
  • Roll out and up your op0ons depending on market condi0ons

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Quick Summary

  • Know your Major Support and Resistance areas
  • You must s0ll have a mental stop area where you exit all
  • Not likely hold your LEAPS beyond 6 months 0ll expira0on
  • You do not want Time Premium decay of your LEAPS
  • Roll out your LEAPS if needed
  • Look for your minor resistance when selling your CALLs

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From our education to Your Success

Your next step: candlecharts.com/ncs

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