In most cases, the profit and loss of the buy calendar spread strategy is smaller than that of the simple buy strategy and the vertical spread strategy, even if the underlying fluctuates greatly the next day after entering the market, there is no need to worry too much about the large profit and loss of the portfolio, which is a strategy that can be held with peace of mind.
[Principles and Composition of the Calendar Spread Strategy].
1.What is the calendar spread strategy.
For the strategy we introduced earlier, the contract month is selected in the same month, for example, the same most recent month, or the same next month, without crossing different months; The calendar spread strategy introduced this time is a strategy that places the buying and selling positions in different months. Since the position of the calendar spread is placed in different months, the calendar spread is also known as the time spread or the horizontal spread.
In general, a calendar spread strategy will choose to trade the same option type (e.g. the same call option, or the same put option) and the same strike price, but choose to choose a combination of buy and sell months in different months. From the perspective of the income and expenditure of the premium, the net expenditure of the premium is called the calendar spread, and the net income of the premium is called the selling calendar spread, and the combination is as follows:
2.The principle of the calendar spread strategy.
In the case of ** change of options, the same exercise price of the same option type is usually the same as the direction of premium fluctuation caused by the ** change of the underlying asset, except that the difference is usually only in the fluctuation range of the premium. For example, the current 50 ETF option has a strike price of 30 for a call option, and a strike price of 3 for the next month0 call options, the direction of fluctuation should be the same, the difference is only in the difference of ** or ** points, so buying and selling the same option type at the same time can offset most of the ** fluctuations, leaving only the impact of time value and implied volatility on the premium. A calendar spread strategy is a strategy that is used to earn time value when implied volatility does not change much.
Because the calendar spread strategy is a strategy used to earn time value, in the choice of strike price, the one with the largest time value is generally selected, which is usually around the parity value. In addition, since the trading volume in the far month is usually smaller, and the trading volume is usually higher near the parity value, it is also more convenient to enter the market and the slippage is lower when the exercise price is selected.
3.Types of calendar spread strategies.
As mentioned earlier, the calendar spread strategy is divided into a buy calendar spread strategy and a sell calendar spread strategy, so what is the difference between these two strategies in use?
In the part of buying the calendar spread strategy, since the time value of the near-month option will be deducted faster than that of the far month, the premium income of the selling position in the near month can cover the premium loss of the far month** position in the case of the underlying ** fluctuation is not large, so as to achieve the purpose of profit. In addition, if the option sold in the near month expires and the buy position in the far month continues to hold a position, the premium charged by the sell position can also be used as a cost reduction for the buy position to achieve the purpose of reducing the purchase cost.
In the part of the selling calendar spread, because the time value impairment of the selling position in the far month is less than that in the recent month, it is less difficult to cover the loss of the premium of the buying position in the near month when the underlying fluctuates little. In addition, since the buy position in the near month will expire and settle first, if only the single seller position in the far month is left behind, the risk will also be greater. For the above reasons, the buy calendar spread strategy is more widely used. In the following, we will introduce the strategy of buying calendar spreads.
4.A P&L scenario for a calendar spread strategy.
The following chart shows the profit and loss situation of buying and selling the calendar spread, we can see that the profit and loss situation diagram of the two strategies of the calendar spread and the butterfly spread are actually quite similar, but the composition of the butterfly spread involves 4 positions of long and short 3 strikes, while the calendar spread only contains 1 strike price and 2 positions, which is easier to construct, so the calendar spread can be used in another way, that is, it can be used as an alternative to the butterfly strategy.
[P&L Scenarios and Characteristics of Calendar Spread Strategies].
1.**P&L scenario for calendar spread strategies.
There are two types of profit scenarios for the calendar spread: one is that the profit from the decrease in the premium of the near month position is greater than the loss from the decrease in the premium of the far month position (the time value brings the profit), and the other is that the income from the increase in the premium of the far month position is greater than the loss from the increase in the premium of the near month position (the increase in hidden waves brings the profit). Based on the characteristics of the calendar spread, we can use a simple example to illustrate the profit and loss of the calendar spread:
From the above ** content, we can see that at the beginning of the entry, the point difference between far and near months is 100, the income of the selling position is 100, and the expenditure of the buying position is 200, and the net income and expenditure of the premium is -100. Here are five things to follow:
a) Good: Earn 50 (100-50) for selling positions, earn 50 (250-200) for buying positions, earn 100 in total, and the difference between far and near monthly prices is 200.
b) Difference: 50 (100-150) for the selling position, 50 (150-200) for the buying position, a total of 100, and the difference between the far and near monthly prices is 0.
c) No change: 100 (100-0) for the sell position, 100 (100-200) for the buy position, the total profit and loss is 0, and the price difference between the far and near months is 100.
d) Small profit: 50 (100-50) for the selling position, 20 (180-200) for the buying position, a total of 30, and the difference between the far and near monthly prices is 130.
e) Small loss: the selling position loses 30 (100-130), and the buying position earns 10 (210-200), the total loss is 20, and the price difference between far and near the month is 80.
Based on the above situation, we can find that once the far and near month spread begins to converge (100), then the strategy of buying the calendar spread will generate profits, so the profit and loss of the calendar spread is closely related to the far and near month spread.
Maximum loss point: Although it is actually unlikely that the far and near month ** of scenario (a) and case (b) in the above table will be in different directions, we can also find that the far and near month spread in case (b) is 0, which is in fact almost the maximum loss point for buying the calendar spread, because in most cases, the premium of the near month contract will not exceed the premium of the far month contract (because the far month contract has more time value), that is, when the far and near month contract spread is 0, It is the maximum loss point of buying the calendar spread (because the spread will not < 0), so from the perspective of profit and loss, the spread when buying the calendar spread at the beginning of the market is the maximum cost point, that is, the maximum loss of the strategy portfolio. However, in terms of the probability of occurrence, the maximum loss point is very difficult to appear, because the premium value of the near-month contract is difficult to catch up with the premium of the far-month contract.
Maximum Take Profit: In the Buy Calendar Spread strategy, although the maximum loss can be roughly determined, the maximum profit point cannot be determined immediately. The reason is that when the near-month contract expires, the biggest profit point of the seller's position is that the premium is 0, and since the fluctuation of the near and far contracts is usually in the same direction, the value of the far month contract at this time is usually less than the entry point, so the value of the far month contract is the key to whether the final strategy portfolio can make a profit. In case (c) of the table above, when the premium of the near-month contract is 0, if the premium of the far-month contract is higher than 100, the portfolio will make a profit, and if the premium of the far-month contract is lower than 100, the portfolio will lose. In the most extreme case, when the settlement premium of the near-month contract is 0, the premium of the far-month contract remains unchanged, the price difference is 200, and the profit is 100, but the probability of occurrence is very low.
2.Features of the Buy Calendar Spread Strategy.
1) The maximum loss is limited.
As mentioned earlier, there will be no additional losses in the buy calendar spread strategy and the vertical spread strategy and the inverse ratio spread strategy mentioned earlier, and since the maximum loss of the buy calendar spread strategy is actually very unlikely to occur (the far and near month spread must be 0), the actual profit and loss ratio of the strategy will look better than theoretically. In addition, since the maximum loss is equal to the far and near monthly price difference at the time of entry, you can get a better profit and loss ratio by choosing to enter the market when the far and near month price difference is relatively small.
2) Perception of the trend of the subject matter.
The profit and loss scenario of the buy calendar spread strategy is that the position is closed as close as possible to the strike price at the time of entry, so it is believed that the market will not fluctuate greatly, while the inverse ratio spread we mentioned last time is just the opposite, and the strike price from the entry price is as far away as possible, so the two strategies can just complement each other. For example, a combination of buying a calendar spread strategy with a little bit of an inverse ratio spread strategy as a hedge, or a combination of a base of an inverse ratio spread strategy and a little buying a calendar spread strategy to reduce costs and equity volatility are all feasible ways.
and 3) the impact of implied volatility.
As mentioned above, when the far and near month price difference begins to diverge, the buying calendar spread strategy will begin to make a profit (because the premium of the far month position of the buy rises and the premium of the near month position rises to lose), and when the far and near month ** diverges, it is usually also the time when the implied volatility rises, so choosing to enter the market when the hidden wave is relatively low is also an easier way to make a profit for the strategy of buying the calendar spread.
Implied volatility also shows that buying the calendar spread is better than the single-seller strategy, because the single-seller strategy is not easy to make a profit when the implied volatility is low, first, because the premium charged is lower, and secondly, once the hidden wave begins to rise, then the single-seller strategy is easy to lose, but the buying calendar spread strategy is not worried about the rise of the hidden wave, which is another characteristic of the buy calendar spread strategy.
4) The trading position is not settled at the same time.
The biggest difference between the Buy Calendar Spread strategy and other strategies is that the buy and sell positions do not expire at the same time. Generally speaking, the end date of the calendar spread is the expiration settlement date of the near-month contract, because the value of the near-month contract is determined when it expires, but the value of the far-month contract is still uncertain at this time. If one leg is missing, the profit and loss distribution of the combination will change, so the position will usually be closed when the near-month contract expires.
However, in this feature, we can think from another angle, that is, to operate with the event investment method. For example, after the expiration of the near-month contract, there is an important meeting or data release, and this will affect the market greatly, so investors before this time will generally show a wait-and-see posture, the market volatility is not large, at this time, you can sell the near-month contract options to collect the premium, and as the cost of buying the far-month contract is reduced, and because the volatility of the far-month contract may rise after the event, it may also be profitable to buy the far-month position, which is another way to buy the calendar spread strategy.
[Comparison of the Calendar Spread Strategy with Other Strategies].
1.The ability to resist moderate volatility in the short term.
Calendar spreads, because the buy and sell positions are at the same strike price of the same type of option, can offset most of the profit and loss in a short period of time; The vertical spread has some directionality, so if the underlying fluctuates significantly in a short period of time, the profit and loss will be greater than the calendar spread. Let's take the following scenario as an example:
Example 1: On January 27, 2022, the 50 ETF closed at 3107, on January 28, 2022, the 50 ETF closed at 3036, single day**228%, and the related options** are listed in the table below
The profit and loss comparison of each strategy from January 27th to 28th is as follows:
As can be seen from the table above, on January 28 2Under the 28% range**, the profit and loss of the buy call calendar spread is real value 1 level per group +36, at-the-money group -13 and imaginary value 1 level per group -63, while the profit and loss situation of the bull market spread is -221 and -212, and the single buy subscription strategy is at-the-money -295 and imaginary value 1 level -126, and the loss of the calendar spread is significantly smaller than that of the bull market spread and the single buy strategy.
The profit and loss of the buy put calendar spread are -115 per group of real value 1, -64 per group of at-the-money and -13 per group of imaginary value 1 level, the profit and loss of the bear market spread is +169 and +168 per group, and the single buy put strategy is at-the-money +570 and imaginary value 1 level +358, and the profit of the calendar spread is also smaller than that of the bear market spread and the single-buy put strategy.
To sum up, under the fluctuation range of more than 2% in a single day of the underlying asset, the profit and loss of the calendar spread is still very small, and from the perspective of risk resistance, the buying calendar spread has a good correspondence ability for the fluctuation of the subject matter in the short term.
2.The ability to resist greater volatility in the short term.
Let's take a look at what happens if the underlying fluctuates more
Example 2: On March 14, 2022, the 50 ETF closed at 2832, March 15, 2022, 50 ETF closed at 2687, a single-day plunge of 512%, and the related options** are listed in the table below
The profit and loss comparison of each strategy from March 14th to 15th is as follows:
As can be seen from the above table, under the 5% plunge on March 15, the profit and loss of the buy subscription calendar spread is -170 per group of real value 1 and -196 per group of imaginary value 1 grade, while the profit and loss of the bull market spread is -324 and -327, and the single buy subscription strategy is the real value of 1 level -499 and the imaginary value of 1 level -175, and the loss of the calendar spread is significantly smaller than that of the bull market spread and the single buy subscription strategy.
The profit and loss of the buy put calendar spread are real value 1 level +77 and imaginary value 1 level +48, the profit and loss situation of the bear market spread is +324 and +327 per group, and the single buy put strategy is real value 1 level +1160 and + virtual value 1 level 1487, and the profit situation of the calendar spread is also significantly smaller than that of the bear market spread and the single buy put strategy.
To sum up, a 5% drop in a single day is a very rare situation, but it can still be seen that although the profit and loss of the calendar spread has increased compared with the 2% change in the underlying matter, it is still smaller than the vertical spread and the single buyer, showing that the calendar spread does have a better ability to cope with large fluctuations in a short period of time.
3.Generally, it is placed in the comparison of profit and loss at the settlement exit.
Next, let's take a look at the general situation of the settlement field:
Example 3: On January 27, 2022, the 50 ETF closed at 3107, on February 23, 2022, ETF options settled, and 50ETF closed at 3100, and finally fell slightly by 023%, related options** as shown in the table below
The profit and loss comparison of each strategy from January 27 to February 23 is as follows:
As can be seen from the above table, when the settlement is out, if the underlying ** does not change much, then the single buyer will definitely lose money; In the bull market spread, settlement above the profit and loss is a profit, and settlement below the loss is a loss; In the bear market spread part, settlement above the profit and loss is a loss, and settlement below the loss is a profit; The buy calendar spread, on the other hand, settles around parity as a profit, and settles outside parity as a loss. But even if it is a loss, the loss of the calendar spread is still the smallest of these strategies, indicating a relatively stable profit and loss scenario for buying the calendar spread.
4.Situations where there is a large fluctuation at the time of settlement.
Finally, let's take a look at the situation where the settlement exit point fluctuates greatly from the entry point:
Example 4: On March 1, 2022, the 50 ETF closed at 3105, March 23, 2022, ETF options settled, 50ETF closed at 2899, and finally fell 663%, the relevant options** are as follows:
The comparison of the profit and loss of each strategy from March 1 to 23 is as follows:
As can be seen from the above table, when the underlying asset falls sharply, the simple purchase of the call position will definitely be zero, and the simple purchase of the put position is a substantial profit; The bull spread part is a total loss, while the bear market spread part is a profit; Finally, in the part of buying the calendar spread, the closer to the final settlement price, the more likely it is to make a profit, but even in the strategy 4-2-3 that is far away from the final settlement price, the final loss is only -205 yuan per group, which is still the smallest loss among several strategies.
Based on the above, we can find that in most cases, the profit and loss of buying calendar spreads is smaller than that of simple buying strategies and vertical spreads, even if the underlying fluctuates greatly the next day after entering the market, there is no need to worry too much about the large profit and loss of the portfolio, which is a strategy that can be held with peace of mind.
[Conclusion].
On the one hand, the buy calendar spread strategy has the same characteristics as the vertical spread strategy and the reverse ratio spread strategy we mentioned earlier, and in terms of resisting the risk of large fluctuations in the underlying asset, the buy calendar spread strategy also has a stronger ability to resist ** fluctuations, and the buy calendar spread strategy has the advantage of reducing the overall position risk quite well.
On the other hand, the situation that buying the calendar spread can have a better profit is not far from the parity when the exit is not far away, so it can be used together with the vertical spread strategy and the reverse ratio spread strategy.