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How to Profit in a Calendar Spread with Implied Volatility and Time Decay

Updated: Mar 16

If you are familiar with options trading, you should be aware of the impact that the passage of time - measured by the Greek Theta - and the implied volatility - measured by the Greek Vega - have on the options premium.

At Options Master Trader we believe in trading options as a business using numbers to your advantage. This should not scare you as only basic math is involved. Most of the calculations are already done for you. That is why I encourage anyone serious about options to count on an options management software as the one we use and teach on this website. Where you need to become good at is reading the main numbers impacting on options. These are called the Greeks.

This introduction was to talk about a remarkable trade performed on the Boeing Company (BA). The stock did not go anywhere for the whole length of the trade, nonetheless I managed to achieve a 75% return on the money invested.

Are you ready for this? I entered the strategy on Tuesday the 28th of February 2023 when the stock was trading around $201 and closed the position on Friday the 14th of April, 45 days later with the underlying closing at $201.71. Boeing did not move at all and still I made a sweet $1900 in profit. This was because I traded options rather than purchasing stocks and, being aware of how the numbers and all metrics work, I could open and manage the right options strategy to exploit at its best the market conditions. Keep on reading for the details of the trade and make sure to watch the video below for a visual representation of the stock chart and risk graph.

Getting Advantage of Time Decay and Implied Volatility

It was February 2023 when I started monitoring the chart of the Boeing Company. It seemed to me that BA was starting to trade in a narrow range and that implied volatility (IV) was unusually low. This created a double opportunity as I could purchase options at a discount and wait for an increase in IV and, on the other end, use time decay at my advantage by selling short term options likely to expire worthless.

On Tuesday the 28th of February 2023, I decided to open a Put Calendar Spread. With BA trading around $201, I purchased 6 contracts of the $200 put options expiring on the 18th of August 2023 - 171 days left before expiration - and sold 6 contracts of the $200 put options expiring on the 21st of April 2023 - 52 days left before expiration.

Calendar Spread Options Trading Strategy

I could build a strategy with a maximum profit potential of $3900, a maximum risk of $4500 and a risk/reward ratio of 85%. I had a wide profit area between the Breakeven Points ($32 wide profit area) with a downside BEP at $186 and an upward BEP at $218. The main goal here was to take advantage of a likely increase in implied volatility which could hugely impact on the profit potential of the strategy. The Vega on this trade was +$140 meaning that every $1 increase in IV would create a profit of $140. In addition, I could count on a daily profit of almost $24 (the strategy is Theta positive) just thanks to the passage of time as long as the underlying was trading within the profit area and close to the strike prices.

Adjusting the Calendar Spread to Reduce Risk Exposure

After a few days in the trade, there was a substantial increase in the value of implied volatility which increased the overall value of the Calendar Spread. On Monday the 20th of March, with a profit of $1200 on the strategy, I decided to lock in some profits. This adjustment enhanced the position and reduced the risk exposure. I now had a max risk on the trade of $1700, reduce by a third compared to earlier and a max profit potential of $3100. A risk/reward ratio of 180% on the new adjusted Calendar Spread.

What was remarkable about this trade is that I have an even wider profit area. The lower BEP is at $176, and the higher BEP is at $233. This makes up for a profit area $57 wide ($32 wider than on the original Calendar). Now the odds of this trade are totally in my favor and with still 32 days left on the strategy I can quite comfortably get some additional profit for effect of time decay.

On Friday the 14th of April, with only 7 days left on the trade, I decided to close the Calendar Spread with a total profit of $1900. Considering that for the length of the trade (45 days) the stock did not go anywhere this was an outstanding profit, which could be achieved thanks to the understanding of the options Greeks Vega and Theta and their impact on the options premium. If you want to explore further, these are all concepts I introduce in my options trading video course and in the 1-2-1 coaching sessions provided on the website.

Hope you enjoyed this trade!

I’ll see you on my next release of the Options Trading Diary.




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