Enjoy the Flexibility of the Calendar Straddle – One Covers the Other

The Calendar Straddle is an options strategy formulated to earn a profit when low volatility is present in the underlying asset. It is also called a neutral options strategy.

It is a combination of both a short term straddle and a long term straddle. The trader sells the short term straddle and buys a long term straddle with the objective of realizing profit due to the slower rate of time decay on the long term straddle compared to the short-dated one. Since short-dated options expire more rapidly than longer-dated ones, the difference becomes your profit.

A calendar straddle is also known as a horizontal spread because the trader purchases option contracts that expire on one date while selling other options expiring on another date. You’re also looking to take advantage of the differences in the options implied volatility for different time periods. As a trader, you should only use this strategy when you can purchase the longer-dated options at a relatively cheaper price than the shorter-dated ones that you’re selling.

The best time to pick a calendar straddle strategy is when the price action of the underlying stock or other asset is expected to remain stable in the short term but in the longer term should break out to make a more significant move. In this case, all the options should finish at the same strike price.

Two Ways the Calendar Straddle Profits

This type of trading is mostly done by veteran options traders. Profits can be achieved in two different ways. Firstly, from the higher rate of time decay on the short-dated options compared to the long-dated ones, and secondly, through a secondary profit realized by the longer-dated straddle following a reasonable price movement in the underlying.

The Calendar straddle is appealing because it has the ability to profit when the price action of the underlying asset is stagnant. It also offers flexibility to the trader to cash in on the long term straddle when the value of the stock is expected to reach a breakout stage. It also has limited risk with no margin required to hold the trade.

If you expect the value of the underlying to move significantly shortly after the expiration of the short-dated options (weekly or monthly) then you can allow the short-dated straddle to expire without rolling further. If not, then once expired, and assuming your long-dated options are a few months away, you may wish to sell another short-dated straddle position and receive more income if you think the conditions are right.

The profit associated with this trading technique is limited in the short term but can be huge in the longer term. Losses are limited to the net debit after subtracting the credit from the short position from the longer-dated straddle. Using risk graphs, you can determine your expected profit levels.

Calendar Straddle strategies provide one of the best opportunities to benefit from stocks with consolidating or stagnant price action or in a tight trading range. The only disadvantage is that profit potential is limited up until the expiration of the sold options. After that, if you’re lucky, the price of the underlying could explode, the implied volatility might balloon on your bought positions so that theoretically, profits could be unlimited.

The calendar straddle, or neutral options strategy, is an advanced options trading strategy. It is simple to implement and the only variations might be how far away you choose for the expiration of your long straddle. The determining factor would be implied volatility (IV). You should choose months with the lowest IV. By doing it right, you can make a stable income with minimal risk.

Enjoy This Video About the Calendar Straddle

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One of the reasons why “bottom fishing stocks” is the best time to use this strategy is that, due to the huge stock selloff, the implied volatility in the put option prices will normally be high. This means that the near-money options that you’re selling will be at inflated prices, thus bringing you a greater credit for the transaction.

You get paid a handsome sum for simply waiting for the stock to fall further – if it does.

Another Huge Advantage

Instead of creating a vertical put credit spread for bottom fishing stocks as outlined above, you could choose instead to make it a diagonal spread. This means that you would sell the near month put option and buy a long-dated put option at a lower strike price.

You may be exercised on the near month option and own the 500 shares, ready for a covered call strategy, but you will also now have a long-dated put option at a lower strike price, over which you can continue to sell more put options each month, or under which you can create a debit spread, bringing you even more income.

Details of this strategy along with so many more powerful secrets about the art of adjustments for options trading profit are outlined in the Trading Pro System.

Whether you only have a few thousand dollars or a large sum to invest, the Three Legged Box Options Spread is one of the best option trading strategies available for retail investors today. You can try all kinds of strategies but according to well-known veteran trader David Vallieres, this one is the best. The appealing thing about it is, that it’s execution is easy while it’s results are reliable and consistent.

We would call the three-legged box spread a “lifestyle” type trade, meaning that you don’t have to keep watching the market for most of the day. It’s the type of setup which, once entered, only requires monitoring a few times each week in conjunction with setting up an alert with your broker as to when a target price in your underlying instrument has been reached.

It’s not a day trading, nor a high-frequency options trading system. Nor is it about scalping, or forex options trading, or binary options. You could almost call it the perfect option strategy.

Some Benefits of the Three-Legged Box:

A high profit to loss ratio – you don’t need to get a high percentage of trades correct to make an overall profit.

Flexibility – there are many variations on how you choose to enter the trade.

Longer expiration dates – gives you plenty of time to be right and less account “churning” (turning over your money many times and paying multiple brokerage commissions).

A clearly defined loss – over hundreds of trades, the average loss is about $413 and you don’t need to place stops. Have you ever put on a trade, only to be stopped out just before it goes into profit? Three-legged box options eliminate this from happening because a maximum loss is already built-in – and it’s time friendly.

Defined profit targets – The average profit, based on one contract for each leg of the trade, is $1,340.

Very easy to open and close trades – no complicated spreads.

No overnight “worries” i.e. big moves or assignment.
Clear entry and exit points.

No adjustments necessary – it just works or it doesn’t.

Relaxed, informed, and thoughtful trading. You just scan the markets, looking for a special set of parameters in the underlying, and then place the trades.

You can trade single contracts and keep brokerage commissions low

This system is more effective than using iron condors, calendar spreads, butterflies, etc. etc.

Successful option traders know what kind of market they’re in. This is critical. With the above option trading strategies, the ideal time to place these trades is when the VIX (Volatility Index) is at 40 and coming down. At such times you have premium in the market, which provides option selling opportunities. When the VIX is below 20 these are not the most optimum strategies, (even though they’re still very effective).

But with the three legged box spread, it doesn’t matter what kind of market volatility you’re in. It could be high (VIX above 40) or low (VIX below 20) or somewhere in between – and this type of trade works just as well in any.

If you specialize in your trading style, you will make a lot more money than if you’re trying different things. This is because you’ll perfect your technique and know a lot about your strategy. The three-legged box is the best one to get to know.

You have to treat this like a business and this means an expectation of a profit. Studying volatility and understanding what kind of market you’re in, or entering, increases your winning percentages of profitability. If you want to be in the top 2 percent of traders then you have to know this.

The three legged box spread has limited risk but unlimited profits to the upside.

What’s a Box Spread?

Before we can talk about a three-legged box spread, we first need to understand what a regular Box Spread is. It’s a trade that has 4 option ‘legs’ at two different strike prices which, if purchased for less than the difference of the strike prices, gives you a guaranteed profit.

So let’s break down a box spread into its components, with the added feature of the delta.

Looking at the graph above, with the underlying stock currently trading at $67.50, the 55 calls would be in-the-money (ITM) while the puts would be out-of-the-money (OTM). This being the case, we can speculate that the delta on the call options would be about .89 while the puts, being OTM, would have a delta of .11. Adding the two deltas together would give us a combined delta of 1.00.

Now if we were to simultaneously purchase a 55 call and sell a 55 put under these conditions, we would create what is called a “synthetic stock position” which is another way of saying that in terms of price movement in the underlying, the unrealized profit or loss would be the same as if we had actually bought the shares. It would be much cheaper than buying the underlying stock, but would also carry the associated risk of losing more than our initial trade investment amount, in the same way as if we had “gone long” a leveraged futures, spot forex or CFD contract.

If we were to do the same thing on the 75 calls and puts, per the chart below, we would create what is called a “synthetic short stock position”. The effect would be just the same as if we had short-sold the underlying stock covered by the options contracts, instead of using options.

So by creating a regular box spread with just one contract for each leg, we achieve the same thing as if we had purchased 100 of the underlying stock at $55 and short-sold 100 shares of the same stock at $75. One counter-balances the other, but with a $20 price difference in between.

Now here’s the trick – if you can enter the 4 legs of this trade for less than the difference in strike prices including brokerage commissions, then you can forget it until the option expiration date when you will make a guaranteed profit – being the net credit.

Unfortunately, it is very difficult for retail traders to put a full box spread trade on and make any money. Floor traders can do it because they don’t pay brokerage commissions and if they can buy it for less than $20 (in this case) they will make a guaranteed profit.

However, there are some retail traders who have “legged into” the box spread and done so in a retail environment, to their advantage. If your expiration dates are far enough away, giving you enough time to get the initial direction right, you can lock in profits.

The Long Three Legged Box Spread

Instead of having 4 option ‘legs’ which creates a box spread, we’re only going to have 3 legs. So taking the example we’ve been looking at above, if we remove the ITM long call option from the equation, we end up with a basic long 3 legged box spread. So we’re going to be:

• Buying a 65 call
• Selling a 65 put
• Buying a 55 put (for protection, as well as for margin reasons)

The first two above positions have effectively created a synthetic long stock position and the third position covers, or “insures” it to some degree with a protective put.

We would place the above trade if we anticipate the future price action of the underlying to rise by at least 5 percent. So in this case, it would be $67.50 x 1.05 = $70.88 (let’s say $71 to keep it simple). Notice that all the strike prices are below the current market price of $67.50.

The above “long” three-legged box gives us a predefined loss on the trade, which means we don’t need any stops. It also satisfies our broker’s margin requirements because we are not over-exposed to risk.

If this stock doesn’t move, the sold $65 put will generate some theta premium for us. We essentially have a bear put credit spread alongside a long ATM call position. Let’s take a look at the profit graph at expiration.

If the stock goes nowhere, we have a maximum loss of $230. If the price action goes against us, our maximum loss will be $520. But if the price action goes in our favor (i.e. it rises) then a 5{3a39a80e0257ac0455bc3b3978d4f68a2ed2cda6344ecf0a5f3dbf28ade020eb} move in the underlying will give us a target profit of $1480. If we’re lucky and see a 10{3a39a80e0257ac0455bc3b3978d4f68a2ed2cda6344ecf0a5f3dbf28ade020eb} move, we realize a profit of $2960 on just one option contract.

Once in a while, we will “hit the jackpot” when a news event or similar, causes an upwards price spike. Sometimes the market will initially go against us but then will reverse and go in the direction we have anticipated. Using the 3 legged box, we give ourselves plenty of time for it to do so.

The Short Three Legged Box Spread

In this case, if we remove the OTM put options from the original box spread above, we get our short three-legged box. We going to:

• Sell 70 calls
• Buy 80 calls
• Buy 70 put

It’s simply the reverse of the Long Three Legged Box spread described above.

Looking at the profit graph again, a 5{3a39a80e0257ac0455bc3b3978d4f68a2ed2cda6344ecf0a5f3dbf28ade020eb} fall in the underlying will realize a profit of $1480 while a 10{3a39a80e0257ac0455bc3b3978d4f68a2ed2cda6344ecf0a5f3dbf28ade020eb} downward move will reward us with $2960. If the price of the stock goes up instead of our anticipated downward direction, our maximum loss will be $520. If it goes nowhere, we lose a maximum $230.

All the above figures are based on using only single contracts. If you traded 2 contracts per leg, you would double your profit potential as well as your potential loss levels …. and so on.

Three Legged Box Spread – Things to Keep in Mind

Before entering a three-legged box spread you have to know the kind of market you’re getting into, especially the historical volatility of the underlying stock or other financial instruments. You’re looking for an underlying stock or commodity future that you believe will MOVE.

You also need to choose a financial instrument that has a liquid options market for this to work. Implied Volatility in the options can provide opportunities for variations in the strike prices you choose.

You should also never use 2x or 3x ETF’s. These are designed for day trading and can hurt you. You should also prefer stocks or ETFs that are trading in the $100 price range. This makes the 5{3a39a80e0257ac0455bc3b3978d4f68a2ed2cda6344ecf0a5f3dbf28ade020eb} rule as outlined above much easier to calculate. Historically speaking, stocks in the $100 range are more likely to move the required 5{3a39a80e0257ac0455bc3b3978d4f68a2ed2cda6344ecf0a5f3dbf28ade020eb} for this strategy to work effectively.

Typically, we would not hold a 3 legged box till the expiration date. We choose options that have 6-9 months until expiration. This gives us plenty of time to be right.

Three Legged Box Spread Variation Example

If we can’t get a favorable P&L graph due to Implied Volatility being unfavorable, we can create a slightly skewed three-legged box that converts the risk graph into something more appealing. In the end, you want to see a favorable “profit & loss at expiration” graph.

So experiment with strike prices and analyze.

Here’s another example of a three-legged box taken on the DIA (“Diamonds”) ETF (which is based on the DOW Index). Notice the initial strike prices which are around the DIA when it’s trading at $170.50

But due to the implied volatility in the options, we might choose to buy a 165 put instead of the 170.

Here are some examples of stocks and ETFs that trade on the US markets that work well with the 3 legged box spread:

DIA
GLD
AAPL
SPY
IWM
QQQ
EEM
XAU
TLT

The Three Legged Box Option Trade

Have you ever wondered whether it’s possible to enjoy trading setups in the financial markets, that are not only highly profitable, but virtually “risk free”?

I’ve recently been reviewing a series of training videos by a well known trading veteran, where he explains to his viewers, exactly how to do that – in 3 different ways.

He calls it “Near Riskless Trading” – or NRT for short.

These excellent training videos reveal the specific strategies and market conditions under which you implement them. All the assets on the site are fully downloadable.

Discover the NRT Strategies Here

How Near Riskless Trading Works

The strategies involved, create a unique arbitrage opportunity that makes a profit, no matter which way the underlying instruments move after you’ve placed the trade. The hedged positions protect you from losses, don’t require you to have “stops” in place and don’t involve constant monitoring. You can hold them over the weekends without worrying what might happen on Monday.

I don’t believe this particular strategy is, at time of writing, being taught anywhere else.

To appreciate the true value of these strategies, you will first need some undersanding of how the “option greeks” and especially, the delta, affect the pricing of options.

For this reason, the “Near Riskless Trading” strategies are part of a larger concept, known as “High Level Options Mentoring” (HLOM).

At time of writing, there are 48 videos available, covering two separate mentoring groups. There are approximately 22 videos per group, as some groups are combined. They are a little ‘long winded’ because they are recordings of live training sessions, but if you want the short version, you can also download and print the PDF ‘written’ version and read details of the three NRT strategies there.

Then you might want to head over to the recorded ‘live’ sessions and listen to the discussion and watch the actual setups on your TV or computer screen. The trainer uses the ThinkorSwim (TOS) platform to describe the setups. More than that in fact – you also receive downloadable ‘templates’ which you can import into the TOS trading platform. These give you the signals that you’ll need to enter and exit positions.

You can also ask questions about any content that you see in any of the mentoring videos, or any other training material on the site for that matter – in the “comments” box and receive answers.

One thing that occurred to me while watching the Near Riskless Trading videos, was that, even though the focus of these strategies is based on US markets, some of the strategies could be adopted to option trading in countries outside the USA, where other trading instruments such as “contracts for difference” are available.

The only thing that you will need to be sure of, is that your options broker, or software, can provide you with the “delta” in the option chains.

Trade With Other Peoples’ Money

Once you understand the Near Riskless Trading strategies, you’ll also find another series of training videos on the membership site, which teach you how to use your knowledge to trade with between $30,000 up to $250,000 of “crowd funded” money.

These firms don’t require any entry costs, but they do expect you to “pass their test” before giving you real money to trade with. When I say “test”, this doesn’t mean anything academic – they just want to see how you perform with “paper trading” first.

Discover the NRT Strategies Here

Here’s a summary of what you get with the High Level Options Mentoring and NRT strategies:

1. Downloadable files, spreadsheets and TOS templates relevant to the system.
2. 48 Downloadable recorded private mentoring sessions.
3. “Trading Room” recorded sessions.
4. Technical Analysis for charts, training.
5. Opportunity to join any future “live” mentoring sessions.
6. Information on how to use these strategies successfully with crowd funded money.