In this episode of Know Your Options, Liz & Jenny discuss three variations of calendar spreads. They discuss duration calendars, earnings calendars, and calendars that set up into earnings calendars! Find out what they look for, how these are set up, and when they like to use them!

Liz: Hi everybody, welcome back to the LIZ & JNY Show. I'm Liz, this is Jenny, and this is our Know Your Options segment.
Jenny: Liz's computer has to go, my new computer is so big. Her calculator doesn't fit here anymore.
Liz: Jenny's computer … We're just getting everything extra-large. That's what Jenny said. Can we get some big giant mug in here to drink our coffee from tomorrow?
Jenny: It didn't seem that big when I bought it, until I got to work. When I was at the store comparing it to all the other laptops that were about the same size, it didn't seem so big.
Liz: Your other one was about this big though. It was a tiny baby little computer.
Jenny: It was small.
Liz: It was the size of my calculator. Well, our CFO Michelle's calculator.
Jenny: Okay, so it is a little bit large. I don't even know if I can reach it. But, anyway. This is Know Your Options and we are doing calendars. We are going to talk about three different types of calendars. I did say, and maybe it wasn't to Liz, maybe it was to myself, because I do talk to myself. Why are we doing durational calendars when there's so much else to do.
Liz: It was totally in your head. I said, "What do you want to do for Know Your Options tomorrow?" And she said "We have to do durational calendars!"
Jenny: I know, I said the schedule is, we always do durational calendars the week after expiration.
Liz: And then in your head.
Jenny: And then on my own I said to myself, "I wish we didn't have to do durational calendars because there's so much else to do."
Liz: There is never a dull moment on the Liz and Jenny set. Today I want to talk real briefly about calendars. When Jenny and I say calendars, there are three specific types of calendars, that all three have different set up criteria. Which does get confusing because at the end of the day, they're always calendars. Calendars are selling an option and buying the same strike option in a different month. Typically we're always selling the near term month, and buying the farther term month. There are three types. One durational calendars, two earnings calendars, and three earnings set up calendars. They're very distinct in what we look for, for those three. But today is durational calendars. If you're confused about the set ups for the other three, please search the archives.
Jenny: Search the archives and you should be able to find them. Earnings calendars are when we do a calendar on the eve of earnings. It's a directional play, and you'll actually see that during Trade Small, Trade Often, we had a Boeing position, we had a calendar in Boeing, and we're going to be doing something with that. So if you want to learn more about earnings calendars, you could actually learn a lesson on earning set up calendars and earnings calendars from the Boeing trade because it was an earnings set up calendar.
Liz: It was an earnings set up that turns into an earnings calendar. That is completely different than what we look for with our durational calendars. I know that gets confusing and we apologize about that. I wish they all had very distinct buckets of names, but they don't. Just because it's a calendar. When you calendarize something, you're using the same strike, buying and selling over different months.
Jenny: When you calendarize something, and you put on a durational calendar, you might think that a product is going in a certain direction. You say, "I think this product is going up." And you would put in a call calendar to the upside, and that could be profitable if the product does go up towards your strike. The bad thing about calendars is if it goes too far past, you could be right direction-ally, but lose money on the trade because if it goes too far beyond your calendar strike then it could turn into a loser.
Liz: Absolutely. Calendars are a little bit tricky.
Jenny: They're a nice trade for beginners because they're a very, very defined risk. What you pay for them is your risk, and you can do them for really low prices.
Liz: They are inexpensive trades that kind of expedite the process of what you want, where you want it to go. You're buying and selling options. It's a very low risk trade. It's also one of the hardest conceptionally to wrap their brain around. As that short one rolls off, people start to panic, thinking that their risk is undefined, and it's still a defined position.
Jenny: It's a defined risk position. If you're out there on your own looking at calendars, very cheap calendars might look enticing, 10 cents, 15 cents … From our experience, those don't really pay out over time. What we've learning from doing calendars over the last three years … Say we've put a calendar in every week for the last three years, that would only add up to not that many calendars. Fifty two weeks in a year, three calendars per week, how many calendars? One hundred and fifty-six calendars? We've done a lot more than that.
Liz: We've done a lot more than that.
Jenny: From our experience, you can't look for a lot of a calendar. We look for thirty percent of what we paid for the calendar, and that's it.
Liz: Part of the reason why we look for expensive calendars is because of our own greed. If you take things on a percentage basis, there are fees in, there are fees out. If I'm paying a dime for something, and I make 12 cent of it, that's a twenty percent return. If I buy something for a dime and sell it for 13 cents, that's a thirty percent return. But then you've got to remember, fees in fees out, so learn from our mistakes.
Jenny: It's not about being greedy, so you have a $10 calendar and you're paying for two contracts in, two contracts out, and all we're hoping to make is thirty percent. On a $10 calendar, you're going to make $3. You've got to understand, we moved to the more expensive calendars because we know we have to cover … there are fees involved in trading, and that's just trading.
Liz: How do you get to an expensive calendar you ask? You need a more expensive product. It's tricky to trade calendars in your $20 products, your $30 products. Something that's near $100 or higher, is typically where we look for calendars. We don't want it too high. I don't want to pay too much for my calendar. I don't want to pay $600 for a calendar either. There's got to be a median.
Jenny: There's a fine line. There's a fine line.
Liz: Right.
Jenny: If you want a directional play like a calendar and it just seems to expensive that's when you could look at making that a diagonal.
Liz: Right.
Jenny: Let's look at calendars. You want something with a lower implied volatility. We're looking at apple today. How much did the volatility come down?
Liz: When I looked at it this morning the IVR was about a 20.
Jenny: Okay. Current IVR percentile 29 based on a 23.
Liz: When we look for durational calendars, we look for two things. Basically we want the implied volatility to be low versus itself. We want a low IVR. We want that rank number to be very low.
Jenny: Mm-hmm (affirmative).
Liz: Typically when it was low we were looking for zeros but when I flipped over the cards in my market watch tab, 20 was pretty good.
Jenny: Well you can see right here just visually looking at this implied volatility chart, see this drop we've had in implied volatility in Apple since the earnings announcement came out.
Liz: That's kind of what you expect to see. After earnings you expect a [Vall collapse 00:06:53].
Jenny: Mm-hmm (affirmative). It's trading 102 [inaudible 00:06:58] We still have that on in here.
Liz: Yeah, we do have that on in here. The reason we kind of looked towards Apple today is both of us said yesterday, we thought Apple was going to stay around 100. I don't know if your directional assumption has changed since this [crosstalk 00:07:12]
Jenny: Honestly mine is different. I sold a bunch of call spreads to finance some put spreads. I bought some long put spreads in Apple. I didn't want to pay for them so I sold a bunch of call spreads to pay for them. I sold call spreads further out in time in November so I'm short a lot of call spreads in November in Apple so I'm not going to do a downside calendar because I already have a downside position. If I were to put it on, I actually might put on the 105 calendar to give me some upside protection.
Liz: Okay. That's a great example of how you would retrofit a calendar to fit your - This is a lot where we pick our directional assumption from calendars because we don't know. We do them very tight to where they at the monies are. We're not going too far. We're not going to try to bet that it's going to 120 or down to 80. We keep them pretty much wrapped around the at the monies, and that can kind of retrofit your position.
Jenny: Right.
Liz: If you already have a position that you need help with.
Jenny: Right. Say you do have a position but you do need some protection on one side or the other. It's not too expensive of a position to put on there to kind of help you because in a calendar you're buying an option that has more days until expiration. It's further out in time and you're selling one that's closer. The one that you're selling that's closer in time is going to decay quicker, lose more value than your long option will.
Liz: Right, absolutely. That's all we're playing for is we want that decay - We want that long option to benefit from a rise in volatility and we want that short option to decay quicker. That's kind of the crux of a calendar when you're picking it.
Jenny: Okay. For the sack of the show let's just stick with the 100.
Liz: I have both in so it doesn't matter to me.
Jenny: Oh, you've got up and down?
Liz: I had a residual calendar of the 105 which is actually making money today so it doesn't matter to me. Whichever you want to put in.
Jenny: Okay. With Apple trade, if we went up if we went out and bought the Dec and sold the Nov which this is why we look at durational calendars the week after expiration because you've got around 60 days to your second month and you've got 30 days to your near month.
Liz: All we're looking at is we want to show you how you can use the option chain to say, "Okay. Am I going to lose money if Apple stays in a bubble?” If it doesn't move, I don't want to pay too much for something where if it doesn't move at all I'm going to lose money. When the days are as close to 50% of each other - The one that you're selling is close to 50% of the one that you are buying you can take a look at the option price and say, "Okay. If just time elapses, what could the possible long option be worth?"
Jenny: Right because if you're buying December and you're selling November when November expires in 30 days your Decembers are going to have 30 days until expiration so let's take a look. With volatility lower - With volatility in November 23 which is around a 29% IV rank so with volatility on the lower end when these options have 30 days to go what are they worth? You look at those values and that's going to give you a good idea of what the value of yours might be when your short options are about to expire.
Liz: Right. On a durational calendar you want your short option to be worth more than the total package you're paying for the calendar.
Jenny: If I'm just looking at the 105 here in November and I see that the November 105 is worth about $1.12 to $1.14 so let's say that's about $113. I want to pay less than $113 for that 105 calendar.
Liz: Right. This is your benchmark. You know that this is the one you're selling. You're selling the near term. You're buying the long term and you want to make sure that your entire package is less than this because in a bubble you stay right here. Apple volatility stays here, this doesn't move. I want to make sure that I'm not going to lose money just for putting it in.
Jenny: If we're buying the 105 calendar buying Dec selling Nov. We want that calendar to be cheaper than the Nov 105 option.
Liz: Right.
Jenny: If I'm going to buy the Dec 105 and I'm going to sell the Nov 105 -
Liz: We're using regular standard options.
Jenny: [crosstalk 00:11:11] regular monthly's.
Liz: Mm-hmm (affirmative). 88 cents so we're paying 88 cents for something that in a bubble could be worth 1.12.
Jenny: If Apple stayed right here and volatility stayed where it was. We know we're paying 88 cents for something that in 30 days could be worth about $1.15. What we want to happen, if you're putting this on, you want Apple to go up towards that 105 strike then this would be worth more or you want volatility to expand. Then this would be worth more as well.
Liz: Then it would be worth more, exactly.
Jenny: How do we know it would be worth more if Apple went up? Look at the at the monies. If the 105 strike became the at the monies strike, look at the at the monies strike with 30 days to go. [crosstalk 00:11:50] The 102 with 30 days to go is worth 230. If in 30 days Apple’s up to 105, your Nov is expiring but now it's trading your 105. Well that's going to be worth about 230 and we're paying 88 cents for this.
Liz: Right. We set up these calendars and then we also try to realize that we want to make sure that we're putting a GTC order in for this pretty quickly because lots of things can happen. This is lots of moving parts. You get to see this. If Apple declines in value, say it's trading near 98 at expiration. Then this calendar will be at a loss but it won't be the full 88 cents.
Jenny: If we're doing this 105 strike which is $3 above where Apple's trading and then Apple goes down $2, let's go up $2 and see the value of that 107. If Apple goes down $2 from when we put this calendar on, that is going to only be worth about 67 cents and we paid 88 cents for it so it would be a loser.
Liz: It would be a loser but you realize there's still time. What's helping you is that back month that you’re long. There's a lot of people that look at calendars as if they want the option - Based on the assumption, if I wanted this 105 option but I didn't want to pay $1.13 for it. Well, would I pay 88 cents for it? Maybe.
Jenny: Yeah.
Liz: That's what you're doing. You're getting that back month at a discount. You're using a sale of an option to help the purchase of an option.
Jenny: Right, exactly. I mentioned diagonals. If you don't want to pay that much for the calendar you can do a diagonal and that is simply just so people understand that would simply be - Buying the 105 in November and instead of selling the 105 - Buying the December and instead of selling the November 105 you might sell that November 104. Now this is 54 cents instead of 88 but what you need to happen is Apple stay below 104 by that November expiration.
Liz: Then you are left with your December 105 that you've only paid 55 cents for. You can diagonalize things. The reason we look at this is because we want - That's typically how we will set things up and honestly play with them. If we put the regular standard 105 calendar in and I had to pay $1.20 for it I'd probably find a different strike.
Jenny: Look for a different strike, set it up differently, exactly. We wouldn't be doing that. Based … on the heels of the email we received about somebody with many bullish positions and nervous about the market having another downturn. If that were the case in my portfolio, if my portfolio was full of bullish positions I wouldn't do an upside calendar. I would probably do a downside calendar.
Liz: I would do a downside calendar, but I mean warning, low [inaudible 00:14:25] calendars don't protect you to the downside too much because -
Jenny: Yes.
Liz: It can blow right through it. That's why they're tricky. We set them up a lot in low volatility environments because of this. Calendars will benefit from an increase in volatility. I will pick the direction of my calendar; Jenny is spot on there. I will go to the downside just because instead of the upside, it can still make money if the volatility comes up if it's right around there.
Jenny: Mm-hmm (affirmative).
Liz: It won't protect me too much. If Apple kind of decides to trade down towards 190, even that 100 calendar isn't going to protect me.
Jenny: Right. It's not going to give you - If you've got tons of bullish positions and the market crashes, the downside calendars are not going to give you protection.
Liz: Right.
Jenny: If we're having just normal market movement and the markets moving up, and the market’s moving down, and the market’s moving up, and the market’s moving down I want to have positions on both sides. One day I'm taking profits on my bearish trades and other days I'm taking profit on my bullish trades.
Liz: Right, absolutely. That's exactly what we expect to happen. Now just for fun can we pull up the Nov 100?
Jenny: Yeah.
Liz: The only reason I'm saying to kind of just for fun is, we pick our calendar, we pick calls or puts based on our directional assumption because if we're wrong we don't have to close it and it can expire worthless. Calendars on both sides. If you did the 105 calls calendar and the 105 put calendar they should be exactly the same price.
Jenny: Oh, did you want me to pull up the 105 call? Or the 100?
Liz: The 100 put.
Jenny: Oh yeah.
Liz: We always choose the out of the monies. That's just something that we mechanically go to. If I'm trading a durational calendar and I'm going to the upside I'm picking the calls. If I'm going to the downside I pick the puts.
Jenny: Right. We want to use the out of the monies that way if it's still around here it remains out of the money and we don't have to pay the commissions to close the trade.
Liz: Right. To get into our out of. Then if it goes direction-ally against us our front can roll off as well instead of taking ownership on stack.
Jenny: Yes. Looking at these puts, looking at the 100 level. You look at the November 100 puts, they're worth right here, about a $1.82 at a $1.84 so we know we don't want to pay any more than $1.82 for this calendar. If we did the 100 calendar we don't want to pay more than $1.82.
Liz: Right. Same principles. That's why this is great to see. We know we are going to be buying that 100 put and selling that 100 call.
Jenny: No, no, selling the -
Liz: [crosstalk 00:16:34] I'm sorry the 100 put. 94 cents.
Jenny: 94 cents. That seems like a better deal than the call because we were paying 88 for something that's worth about $1.14. Here we're paying 94 for something that in November is worth $1.82
Liz: It could possibly be worth $1.42 if we stayed right here.
Jenny: Mm-hmm (affirmative). What that kind of tells me is that maybe Apple will inch up to 105 but if it's going down - That kind of tells me that if it's going down it's probably not going to go and sit at 100.
Liz: You don't think it's going to sit at 100?
Jenny: Well, see sometimes the set ups look really good and I don't know. Sometimes if something looks too good to be true, it might be.
Liz: I know. It's tricky for me because Apple's a different animal now that it's a $100 product versus the $600 product or $700 product that it was but it's a [pinner 00:17:27].
Jenny: Yeah.
Liz: You know what that means? That is just me making an assumption that is probably untrue but pinning means you nail a strike. A lot of times it hits around numbers and something will expire there. It's kind of the law of averages too. People’s assumptions can kind of draw out to that strike.
Jenny: Yeah. I say we just throw both in and if we throw both in, we put in a GTC order right away to just take 30% out of both trades.
Liz: Right. Let's talk about that. If we're paying 88 cents for one and 94 cents for the other; if I want 30% out of them I'm going to be closing them pretty quickly and that GTC order is going to be sitting in there.
Jenny: Yeah. We buy the Dec 100 put, sell that Nov 100 put. It's 93 cents. We're going to ship this and if we want about -
Liz: 0.3
Jenny: 30% of that. Let's say 30 cents - We want 30 cents out of the trade.
Liz: $1.23, put a closing order in for it.Jenny:
Liz: Perfect.
Jenny: Buy the Dec 105 call, sell the Nov 105 call, and that's 87 cents. Ship that and same thing. We'll try to take 30 cents out of each of these.
Liz: Yeah 25, 30 cents. Honestly we're going to get out of those pretty quick.
Jenny: Mm-hmm (affirmative).
Liz: We got filled in one of them. We're going to take a look at these, we'll put the GTC orders in, good until canceled to close it. We're going to take a quick break.
Jenny: Yeah, and we'll come back with Trade Small, Trade Often. We'll go over these GTC orders, plus close our Apple earnings trade, close our GMC trade, and we have a new trade in Boeing.
Liz: Phone lines are open. The last 15 minutes we'll take a call. 855-238-2789 or 855 be tasty.