SPX 15 Day Calendar Spread
This is a neutral options spread (range bound), traded on the SPX index that is generally considered short-term (I would expect to be in this 2 – 5 days). Depending on market conditions, I will put on an SPX 15 Day Calendar Spread at least once or twice a week. If you don’t already know the basics of how a Calendar spread works, I suggest doing a little bit of research. TD has a great article HERE.
Like all spreads on Calm Hedge, this is a high probability play. If you have further questions after reading this, feel free to reach out to me on Twitter @calmhedge. I do not normally respond to DM’s but you can reply to any of my tweets and start a thread.
First let’s consider the market conditions in which I would put this on. More often than not, the conditions are right. It’s all about the trend and volatility.
Considerations:
The VIX. If the VIX is below 20, I will put this trade on. If the VIX is above 20 I will most likely be looking at setting up a Broken Wing Butterfly.
Trend. Are we blasting off in either direction? Making multiple day 1% moves? If so I would hold off on this trade, or at the very least increase the duration of my short.
The Spread:
Let’s say the current Date is: 11/11/2021
The SPX is trading at 4660
The spread would be as follows:
+1 3 DEC 21 4660 Call
-1 26 NOV 21 4660 Call
The “15 Day” is the expiration of my short. My long is 7 days further out from my short (You can do 5 days if you want to allocate less capital).
Make sure your Strike Price is as close to the money as possible. You want to enter the spread right where the underlying currently is.
Here is an example of what it would look like (This is at the end of the day after the underlying moved a bit after entry):
Profit Target and Stop Loss:
Profit Target: 10% of the capital risked.
Stop Loss: 10% – 15% of the capital risked (Depending on market conditions and where the underlying is).
For Example, I put the trade on at a Debit of 12.10, and I am doing 100 contracts. My capital risked is $120,000. My Profit target would be $12,000. My stop loss would be -$12,000 to -$18,000.
How to put it on:
I usually wait until the last 1 – 2 hours of the trading day to put this one. Never put this on during the open. I use the Think Or Swim platform, the easiest way is to just open up the options chain you want, right-click and hit Buy > Calendar, and then analyze it to bring it up in your analyze tab. For our example above, this is what it would look like:
Once you have it set up correctly, you can initiate the trade by right-clicking it and hitting “Confirm and Send”. Again, Make sure your Strike Price is as close to the money as possible. You want to enter the spread right where the underlying currently is. Try not to give up more than 5 or 10 cents to get your order filled. I also like to create “Groups” on my Monitor tab in Think or Swim to house my spreads and keep them separate from each other. You can learn more about groups HERE. Here is an example of one of my Groups for this trade:
After my order is filled and the trade is on, I always bring it back up in the analyze tab, so that I can monitor the graph there when I want to. This is especially helpful if we need to make an adjustment to the trade.
Adjustments
This is a neutral options strategy, meaning we want to generally stay within a certain range and not go too far in either direction. If the SPX is relentlessly running in a direction, then we will often “Adjust” the position for further protection. This can be done to the upside or the downside. In this particular spread it is very easy.
To do this we set “Adjustment Points” on our spread when we originally open it. If you In this particular spread, your adjustment points are around 45 – 50 points to the upside or the downside. You can see on the graph it is always where the profit line meets the spread. See below for an example:
To adjust we simply open a new Calendar spread, same expiration, same options chain, the same amount of contracts, but have it 30 points from your “Adjustment Point”. This simply provides us some extra protection to help ensure we walk away at a profit. Do we hope every single trade goes perfect and we are never in a situation where we are thinking about adjusting? Yes. Unfortunately, this does not always happen.
NOTE: Adjusting this trade increases your capital risked, sometimes doubling it or more. When I make an adjustment, I often set a new profit target and stop loss of 6% – 8% of the new amount of risked capital.
Let’s look at an upside adjustment:
Original Strike Price: 4660
Adjustment Point: 4710
Adjustment Strike Price: 4740
+100 3 DEC 21 4740 Call
-100 26 NOV 21 4740 Call
Let’s look at an Downside adjustment:
Original Strike Price: 4660
Adjustment Point: 4610
Adjustment Strike Price: 4580
+100 3 DEC 21 4580 Call
-100 26 NOV 21 4580 Call
When you make an adjustment, make sure to allocate it into the group where your original spread is located, this will help keep things organized. When you exit, you will have to exit the original spread and the adjustment separately. Just pop them both off in quick succession. The way I like to do it is to open up my analyze tab, right-click each Calendar and click “Analyze Opposite Order” and get them both displayed on my screen. Then you can just unlock the price on your exit spreads and shoot the orders off when you reach your Target or Stop Loss. If you have your own way of doing it, that is fine as well!
Multiple Adjustments:
In the case that things are swinging like crazy, and you haven’t taken your position off yet, you will need to make multiple adjustments. This is very simple so don’t overthink it. Say for example you adjust to the upside, then before you get your exit, the market blasts right back down. If you reach the strike or “Mid Point” of your original spread (the one that lives on the downside), take off the upside spread adjustment. That’s it. You are now sitting with a single un-adjusted spread again and all the same rules apply. If you wanted to, you could just keep adjusting over and over and over until you get your exit. In this scenario, if this happens and you don’t take the upside spread off, and the SPX keeps going down, you will not last long as your upside spread will lose significant value.
The same rules apply to the opposite scenario.
When making multiple adjustments like this, you need to factor in your realized losses into your 6% – 7% profit target. Normally at this point, Theta is working a lot more quickly in your favor, so hold on tight.
Other Considerations
Exits:
Often times you will find that this spread will quickly rack up 5% – 6% or more in 24 hours and it is obviously very tempting to exit your position and take your profits. While you can do this, you must understand the implications. If you are constantly exiting early to take small profits, but holding it to -10% or -15% when taking a loss, that math is not going to add up in your favor. This is a high probability trade, and very versatile when it comes to adjustments and making sure you walk away at a profit, but you are not going to win them all. So if you are going to exit early a bunch and take quick profits, make sure you are cutting your losers early as well.
My advice is to follow the system.
Adjustments:
Again you are adding significant capital to your spread when adjusting. You are also taking capital off when doing multiple adjustments, sometimes with losses. Keep track of everything. Adjusting this trade increases your capital risked, sometimes doubling it or more. When I make an adjustment, I often set a new profit target and stop loss of 6% – 8% of the new amount of risked capital.
Managing the trade:
It’s very rare that I don’t stick to my system of 10% Profit Target and 10% – 15% Stop Loss. However, everyone is different and has their own risk tolerance and views on risk management. I can only speak on what has consistently worked for me over long periods of time. I urge you to do your own homework and think about what works and what does not work for you personally.
The reality of the market is that gaps exist, and black swan events exist. No one can escape them. This is why risk management and capital allocation is so important. Don’t put all of your eggs in one basket, and be mindful of your stop loss.
Most importantly, while this trade is robust, there are market conditions where you should not put it on. Do not just throw these on willy nilly.
Questions?
If you have further questions after reading this, feel free to reach out to me on Twitter @calmhedge. I do not normally respond to DM’s but you can reply to any of my tweets and start a thread.