In this video we’ll be teaching you a very easy to execute options strategy known as the “calendar spread”, but more importantly we’ll explain to you the logic behind this strategy and how powerful it can be when conditions are right.
View Video Transcriptthere’s so many ways to make money
trading options that most day and swing
traders are not even aware of yet they
can be incredibly effective once you
learn how they work
and why i’m seth freubert the head
trader of smb capitals options trading
desk here in manhattan and the traders
on our options desk are
professionals and they have a clear
understanding of the dynamics of options
trays and how to put them together
into powerful strategies that leverage
the properties of options so
if you’re interested in learning a very
simple option strategy that can produce
startling results under the right
conditions then stick around because i
think you’re going to find this eye
[Music]
opening
hi i’m seth freyberg and i’m the head
trader of smb capitals
options trading desk here in manhattan
smb capital is a proprietary trading
firm
located in midtown manhattan and we
provide capital for options and equity
traders from all over the world
trading both remotely and in our offices
here in new york city now
i’d like to suggest that you click on
our subscribe button right now so that
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videos that we produce for traders
and investors all over the world they’re
really very valuable okay so
most traders think of options as a cheap
low risk way of essentially
betting on the movement of a stock and
they are are certainly some guys on our
trading desk who trade options
in exactly that way and incredibly
successfully
but there is another way to trade
options that leverages them in a
completely different way
that can be just as powerful as the way
that day and swing traders use them
and that has to do with what is known as
the time premium
that is built into every option that’s
traded now before we jump into the
specifics
of the trade let’s just do a really
quick review of the way that index
options work
so that everyone watching this video can
understand this lesson
if you’re experienced with index options
just hang in there because
this is going to be quick and then we’ll
jump back into the lesson
okay so now almost all of you are
probably familiar with equity options
where a call
buys you the right to buy 100 shares of
a stock at the strike price of that
option
any time before the option expires and a
put option entitles you to
sell 100 shares at the strike price of
the put before
that option expires but there are also
index options which
works similarly to equity options except
there’s no such thing as
100 shares of an index like the s p 500
you can’t really buy or sell 100 shares
of an index but what you can do
is get paid in cash 100 per point
if the index expires above the strike
price of an index
call that you buy or alternatively you’d
be paid
100 per point for each point the index
drops below the strike price of an index
put so for example if an index is
trading at 31.50 and you buy
the 3160 call if the index closes at
31.65
you get 500 in your account if the index
closes
at 36.10 or lower on the other hand
your coil will expire worthless on the
other side of the ledger if you buy a
31.35
put and the market sells off to 31.25
you’d make a thousand dollars but if the
pro if the market just sold off to 31.35
or higher
the put would expire worthless so those
are the basics of index options and
remember you can buy options
but your broker will also allow you to
sell options and your broker will allow
you to put together
combinations of options in other words
option strategies that involve both
short and long options purchased in a
way that is advantageous to you as a
trader
okay so without his background i’d like
to illustrate this trade by going back
to september
of 2019 where the s p 500 index
was trading up around its all-time highs
at that time
which was around 3 000. so let’s take a
look at what would have happened
had we entered into what options traders
refer to as a
calendar spread so the cleanest way of
explaining this trade is by initiating a
calendar spread
that lasts about a month so you can see
that morning on september 18th
the spx index was trading basically
exactly at 3 000. so on that day
the market was pricing the 3 000 call
expiring month later on october 18th
at 44.48 meaning that over the next
month
the option seller was pricing the risk
of the market rallying strongly and
costing that seller
a lot of money and the option sellers
were pricing that risk
at that 44.48 cents and then moving over
to the spx 3000 strike price options
expiring a month later
on november 15th the options market as
you can see priced that risk
the risk of the market rallying strongly
over a two-month period
and it priced that risk namely at 66
dollars and eight cents
and that makes sense if you think about
it because if the market has
two full months to make a move the
chances of that move taking place are
obviously greater
than if that move is confined to the
next month and so
that difference in price between the
front month
and the back month options at the same
strike is the basis
of why the calendar spread works as
you’re about to find out now before
we get into why this strat spread works
exactly i wanted to let you know
that there are many sound viable
long-term techniques for trading options
for income
and in fact we’re currently running a
two-hour free intensive workshop
where we’ll be teaching you three of
those strategies that real professional
options traders use including
a really simple but incredibly effective
strategy that some of the greatest
investors in the world like warren
buffett use all the time
plus an options trading strategy that
has a statistical
80 probability of profit month in and
month out
plus an option strategy that you can
employ with a stock that you like where
you’ll make your target profit
whether the stock goes up goes nowhere
or even goes down
a small percentage so if those
strategies would be of interest you
then you should check out the free
options class that we’re currently
running just go ahead and click the link
that should be
appearing right now at the top right
corner of your screen that will open the
free registration page
in a new window so don’t worry you won’t
lose this video or
you can just go ahead on over to
optionsclass.com
to register for this free intensive
workshop it’s a rare opportunity for
retail traders and investors
to learn directly from wall street
traders but that’s exactly what you’ll
be getting
through this free online workshop so
click the link to sign up now
and don’t miss it okay now back to our
calendar spread let’s break down
the cash flow on the entry of the trade
so that we can track it as the trade
develops and
so as you can see we sold that 3000
october call for 44.48
but remember that pays off 100
per point above 3 000. so that is
multiplied
by 100 to arrive at your total cash flow
from selling that option which comes to
4 448 now to buy that three thousand
call in november
that has a cost of sixty six dollars and
eight cents as we mentioned
and as you can see from the calculation
that would cost us
six thousand six hundred eight dollars
and so the net cost to us
is the net of those two which brings us
to a debit of two thousand
one hundred sixty dollars for entering
into this trade which is also the
maximum risk
of the trade so that’s how the calendar
spread begins
now let’s move forward six days and it
so happens
the spx was trading almost exactly at 3
000 again but you’ll notice
that the prices have dropped slightly
you see the short call went from 4448
down to 40 54. a drop of 3.94
while the long call also dropped from
6608 to 6259
a drop of 3.49 a bit less
and so since you’re short the october
call
and that lost more value than the
november call that you’re long
the net result is that you have an
unrealized profit of 45
on the spread so far as you can see from
the calculation now
as it turns out the next time that the
spx traded back around 3000
was the final day of the trade which of
course is not going to happen frequently
but definitely can happen now and then
now because the short option expired on
a day that the spx index was trading
at 29.86 which is below the price of
the strike price of 3 000 then that
option will expire
with a value of zero because it has no
value unless the market closes above
its strike price as you’ll recall but
and this is crucial
take a look at the value of the long
call expiring on november 15th
you’ll see that that one has dropped in
half in value to 3297
even though the sbx index is trading
very close to the same level it was
which was 3 000 at the outset of the
trade and that makes
sense right there’s still 28 days to go
for that long option to expire
so there’s still a lot of risk to that
option seller that he’ll have to pay off
on that option
so he still needs to charge a pretty
large premium for that risk
although not as big as its original
premium of 66.08 a month
earlier so both options have dropped in
value
and that’s because time has passed on
both options
yet the price of the index itself hasn’t
changed that much
so now at this point once that short
option has expired
most traders would close this trade as
it’s no longer a calendar spread
rather it has just become simply a long
call and so
therefore let’s take a look at where we
are after the short option expires
and we’re closing the trade well as you
can see the short option the short call
expired worthless as i mentioned and so
the full value
of the premium we receive for that one
flows to profit
and the long option has dropped in value
but not as
much as the short option and so that
difference that
relative speed by which the short option
drops to zero
and the long option loses value but
continues to have value
the difference in that speed is why the
calendar spread makes money
which in this case created a profit of
more than
thousand one hundred dollars which is
against the original
required capital twenty one hundred so
that’s more than fifty percent return in
a month
while this won’t happen a lot where the
market closes very close to the original
entry price
on the trade the calendar spread can be
incredibly rewarding
in cases where that does happen so the
important lesson in this video that i’d
like you to
internalize is that calendar spreads
work because of the relative value of
the short options
compared to the long options which are
farther out in time
and have a greater value but the short
options lose their value
much faster than the long farther dated
options lose their value and so
if the market doesn’t move around too
much
the fact that the short option loses
value so much faster
creates a profit for the trader just by
the passage of time really
which is one of the cool things about
options income trading and one of the
many concepts
that the professional guys here on our
desk utilize in their trading
all the time as i said earlier if you
enjoyed this video and learned something
valuable from it
and you’d like to learn the details of
three real world options strategies
that professional options traders use
all the time then you should check out
the free options class that we’re
currently running just
go ahead and click the link that should
be appearing now at the top
right corner of your screen that will
open the free registration page in a new
window
so don’t worry you won’t lose this video
or you can just head on over
to optionsclass.com to register for this
free intensive workshop
it’s really a rare opportunity for
retail traders and investors to learn
directly from wall street traders but
that’s exactly what you’re going to be
getting
through this free online workshop so
click on the link to sign up now
and please don’t forget to click on the
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* no relevant positions
