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I've received some emails requesting a discussion of calendar spreads. Below is an article that I published a few years ago that will provide you with the basics. Keep in mind that I'm not fond of directional trades. The probabilities

Listen closely. Do you hear that ticking? No, ladies, it's not your biological clock. No, gentlemen, it's not your blood pressure breaking out of a consolidation on its way to a new high. Everything is under control. No need to call the bomb squad. As a matter of fact, with every passing tick, a few more pennies are finding a home - in your pocket - IF you're an option seller.

"One of the best lessons that anyone can learn in life is how to use time wisely. It will pay you huge dividends" - William A. Irwin. Who is William A. Irwin? Hell if I know, but I like what he had to say. The intelligent use of time in option trading can go a long way towards paying for your option therapy, your interior decorator, and your subscription to Martha Stewart's Living in Prison magazine.

Time does fly when you're having fun - and when we sell time, and take in premium, we're having fun. However, the vast majority of option traders are intent on speculating on market direction - even though they're wrong most of the time. The least we can do is to devote a column or two to learning how one can apply a little logic and a potentially profitable strategy to directional option trading. In today's session, we're going to combine directional trading and premium selling as we learn about "calendar spreads."

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The "Horizontal" Calendar Spread
A "horizontal" calendar spread consists of the purchase of a long-term option and the simultaneous sale of a short-term option at the same strike price. For our example we will use ABC - on which we have a neutral to mildly bullish outlook.

ABC closed at $57.34 in mid-May. We will:

1. Buy the ABC September $60 calls @ $4.90

2. Sell the ABC June $60 calls @ $1.65

Total debit is $3.35.

Regardless of where the ABC moves, our total risk is defined at $3.35.

How Do We Make Money?

If we're right about the direction of ABC, it will move up slowly. The delta of the September $60 call is 48. The delta of the June $60 call is 38. That means that for every $1.00 ABC goes up, the value of the September call will increase $.48 and the June call will go up only $.38. We have a positive delta differential of 10. (Delta is the percentage that an option will move in relation to a $1 move in the underlying). Deltas are very important because they'll tell us if, and when, to make adjustments to the position later on.

In a perfect world (and who's kidding who?) ABC would move up to $59.90 by June expiration and the June $60 call would then expire worthless.

At that point we would have two choices. A) Close out the spread and take our profits, or; B) Sell an option out for the next cycle.

A) How much profit do we have? We can approximate the numbers by using our Greek friends - delta and theta. (Theta is the change of an option's value given a one day change in time). Let's gather our fingers, take off our shoes and socks because it's time to calculate. These results will be approximate - but close enough to enable us to make an educated decision.

The delta of the September ABC $60 call is 48. ABC is currently trading at $57.34. We are projecting a slow increase in stock price to finish at $59.90. That's a price increase of $2.56. If we multiply that by 48% (delta), we get $1.23. We then add the $1.23 to the original August $60 call price ($4.90) and get $6.13.

We have to remember that there are still 41 days left to June expiration. The September call will experience time erosion - not a lot, but enough that we should include it in our calculations. The "theta" is .017 per day. 41 x .017 = .697. We'll round it off to $.70. We now subtract this $.70 of time erosion from the $6.13 and we have an approximate value of the September $60 call of $5.43 at June expiration.

It originally cost us $3.35 to put on the calendar spread. If we close the position by selling the August $60 call for $5.43, we will show a profit of $2.08. That's a pretty impressive return on a $3.35 initial risk. Hell, it's PHENOMENAL! It's 62% return on risk. Taking your profit would be the prudent thing to do. Then you can celebrate a little. You earned it.

B) If we still have a bullish outlook on ABC, we could then sell a $65 call for about $1.00 a go through the process again. Our cost basis will have been reduced to about $1.27 ($3.35 - $2.08). ABC will have five more points of room to move up with a much higher delta working for you. How often will that happen? It's about as likely as you marrying a girl named Trixie and living happily ever after.

Let's Get Back To Reality

What happens if . . .
a) What if ABC is at $57 at June expiration? The June $60 call would expire worthless. The September $60 call would have increased in value and we're now free to sell the July $60 call and take in about another $1.25. That would further reduce the cost basis of the September $60 call to $2.10. Even if we take in an about a buck a month, we will have paid for the August call in three months and everything above and beyond is P-R-O-F-I-T. That's music to our ears and more spendable green stuff our bank accounts.

b) What if ABC is at $51 at June expiration? The June $60 call would obviously expire worthless, but you should have had a predetermined stop loss and closed the position- hopefully. If you have no self-discipline, and you're still hoping for a rebound, you can sell the May $60 call for about $.25 while you patiently wait for a bounce back up.

c) What if ABC is at $64 at June expiration? It's moved up a little too quickly. Well, that's one scenario you want to head off at the pass. Why? Because the delta of the June $60 call will likely have surpassed the delta of the September $60 call. That will cost you money if you don't make an adjustment before that plays out. It means the June $60 call will be increasing in value faster than the September $60 call. That's a no-no.

You have to monitor the deltas of both options. You will have to close the spread when the delta of the September $60 call is no longer higher than the delta of the June $60 call. You will likely have made a very respectable profit. If you're still bullish, you can put on another (new) calendar spread using higher strikes.

The "Diagonal" Calendar Spread

A "diagonal calendar spread" is basically the same as the "horizontal" calendar spread except the strike prices are different. Using the example above, a "diagonal" spread might consist of:

Buying the September $55 call @ $7.30

Sell the June $60 call @ $1.65

Total debit of $5.65.

The main benefit is that you are basically buying more delta. The September $55 call has a delta of 63 vs. the 48 delta of the September $60 call. With a "diagonal calendar spread," it's also the months of time you buy in the long option that gives you flexibility. You can buy more or less time, depending on how long you think it will take for the underlying to go in your direction.

Remember that, in both the "horizontal" or "diagonal" calendar spreads, you have many choices. You can take profits (if they exist) by liquidating at any time during the life of the long option. Taking your profits is often a good idea. Why risk a nice profit on the "come." You don't want to risk what you have (profits) for something that hasn't "come" yet (additional).


Our Time Is Up
Well, our time is up for today. Hopefully, today's session has been enlightening and thought provoking. Is life predictable? Yes, to a degree. History often repeats itself, as does human behavior. It's no coincidence.

Also, consider that these same calendar spreads can be done to the downside - using puts. In Sunday's column, we'll come up with a real time example of a calendar spread or two for those of you who are bearish.

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NEW SEMINAR DATE - MARCH 15/16 - NEWARK, NEW JERSEY

Based on your input, I will be presenting a two-day advanced CPTI seminar in New Jersey (Newark) on Friday & Saturday, March 15th & 16th. Contact me (Contact Support) and get your spot reserved - and save $100! (See below for early bird special information). Don't forget about the Chicago seminar on January 26th & 27th.

Join us as we discuss non-directional strategies, trade selection, entry points, exit alternatives, premium negotiation, maintenance alternatives, taxes, and much more - all subjects necessary to enlighten and to maximize your trading business. As you know by now, the seminars usually sell out.

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CPTI JANUARY POSITIONS
CPTI January Position #1 - RUT Bull Put Spread - 773.51

On 12/4, with the RUT at 752, we sold 20 January RUT 620 puts and bought 20 January RUT 610 puts for a credit of $.60 ($1,200). Maintenance is $20,000. We may put on a bear call spread in the future - IF it makes sense.

CPTI January Position #2 - SPX Iron Condor - 1476.27
On 12/10, with the SPX fluctuating, we sold 20 January SPX 1340 puts and bought 20 January SPX 1330 puts for a credit of $.60 ($1,200). Then, we sold 20 January SPX 1630 calls and bought 20 January SPX 1640 calls for a credit of $.55 ($1,100). Net potential profit is $2,300. Maintenance is $20,000.

CPTI January Position #3 - SPX Bull Put Spread - 1476.27
On 12/13, with the SPX at 1472, we sold 20 January SPX 1330 puts and bought 20 January SPX 1320 puts for a credit of $.70 ($1,400). Maintenance is $20,000. We may put on a bear call spread in the future - IF it makes sense.

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ONGOING STRATEGY - THE ZERO-PLUS Strategy
In the past, I outlined a strategy based on an initial investment of $100,000. At that time, $74,000 was spent on zero coupon bonds maturing in about seven years at a value of $100,000. The principal $100,000 investment is guaranteed. We're trading the remaining $26,000 to generate a "risk free" return on the original investment. We are not compounding our profits by dramatically increasing the number of contracts we trade. With the July profits, our new cash total is $56,560 ($55,060 $1,500).

ZERO PLUS POSITION - SPX Bull Put Spread - 1476.27

On 12/13, with the SPX at 1472, we sold 30 January SPX 1330 puts and bought 30 January SPX 1320 puts for a credit of $.70 ($2,100). Maintenance is $30,000. We may put on a bear call spread in the future - IF it makes sense.

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SEMINAR DATES -

CHICAGO, IL - JANUARY 26 & 27

NEWARK, NJ - MARCH 15 & 16 (NEW)

The Chicago seminar is filling up nicely. We filled the room twice before in Chicago. I've chosen a hotel convenient to the airport - eliminating the need to rent a car. You simply take the free airport shuttle to and from the hotel -- convenient and easy. The same is true for the newly announced Newark seminar.

Newark Early Bird Special

Take advantage of the early bird special for the New Jersey seminar and save $100. If you complete your reservation by January 31st, you will save $100. My seminar will then cost only $895 (instead of $995).

There are no more retake spots available for the Chicago seminar. If you want to be on the retake waiting list for Chicago, contact me as soon as possible (mparnos@optioninvestor.com).

Take your trading from a "hobby" to a profitable "business." You need the information you'll learn at my CPTI seminar. You'll learn more than the "how to's" of trading our strategies. You'll learn a new lifestyle - one that can last a lifetime.

DO YOU HAVE PROFIT-ABILITY?
It's always a challenge (and a pleasure) for me to have a roomful of bright people who have a passion for, and are excited about, learning. We go over everything imaginable - from the non-directional strategies to the psychology of trading. We cover a lot more than the mechanics. Inquiring minds want to know the whens and the whys -- not just the hows. That way, they're prepared for the best (and the worst) - and know the best way to handle either situation. Contact me and I'll personally call you with all the details.

If you're a SERIOUS options trader, you want to learn the nuances of our advanced non-directional trading strategies and hone your trading skills. Contact me ASAP at mparnos@optioninvestor.com. Send me your phone number. I will personally call you with all the pertinent information. The price is a bargain - ONLY $995.00 -- less than the profit from one Iron Condor trade. Take advantage of the "early bird special" and save $100. You'll have a two-day experience that you'll remember, and profit from, for a lifetime. I limit my CPTI seminars to ONLY 25 ATTENDEES. And, as a bonus, if you attend one of my CPTI seminars, you are entitled to RETAKE the seminar a SECOND TIME at NO CHARGE!

56 OUT OF 61 PROFITABLE MONTHS!!
WANT TO ACHIEVE SUCCESS WITHOUT STRESS?
OF COURSE YOU DO!!
USE OUR CPTI WEALTH-BUILDING TECHNIQUES!

You should definitely attend one of my seminars. With what you learn, you'll see a substantial increase in your trading results. Contact me at: mparnos@optioninvestor.com. If you've already signed up, I'll see you there. If you haven't signed up, what are you waiting for?

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HAPPY TRADING!
Remember the CPTI credo: Our remote batteries and self-discipline should last forever, but mierde happens. Be prepared! In trading, as in life, it's not the cards we're dealt. It's how we play them.
MIKE PARNOS, Your Options Therapist and CPTI Master Strategist

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Couch Potato Trader Disclaimer
All results reported in this section are hypothetical. While the numbers represented here may have been achieved or beaten by our readers, we make no representation that any individual investor achieved these exact results. The tracking for the plays listed in this section uses closing prices for the day the newsletter is published and it is not meant to imply that any reader actually received those prices (though many often do) or participated in these recommendations (even though many do). The portfolio represented here is hypothetical and for investment education purposes only. It is only an illustration of what type of gains a knowledgeable trader might receive utilizing these strategies. If you don't get close to these results, guess what. It isn't the fault of the strategies.

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