In this blog we do a lot of calendar spread trades. Two questions normally come up all the time:
1) When should we close the calendar spread? Two weeks before option expiration day? One week? Last day?
2) How does profit profile of a calendar spread changes as PPS moves farther away from the strike where the calendar is done? For most people, this is most difficult to understand.
It is all about Gamma and its relationship to Delta. I can start a lengthy discussion here of what that means, but Tom Preston of Think-or-Swim has already done a fantastic job explaining Gamma. Everyone who wants to master the concept of how Gamma effects calendar spread, I highly suggest you read the entire text in the link below. It is a link to PDF file. Save it. One day you'll need it.
Tom Preston on Understanding Gamma Risk
Good luck!
About Me
- Fahad Khalid
- Chicago, IL, United States
- I have Masters in Business (Accounting and Finance 2003) from Michigan State University. I have been trading the market since 1998. Prior to picking up trading as a full-time career in 2008, I was a management consultant at Alvarez & Marsal and Conway MacKenzie for four years. I provided turnaround, crisis management and restructuring services to financially distressed firms. Prior to working in turnaround, I worked in Audit & Assurance at Deloitte & Touche for two years. Trading in the market has always remained my side business ever since I started college. 90% of the time, I trade through options. I love volatility skews and positive Theta plays. While I make a lot of directional bets, in general my favorites are to take advantage of high implied volatilities through calendar or butterfly spreads and vertical credit spreads. I never buy straight calls or puts and I do a lot of exotic multi-leg option trades.
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