Delta Neutral Trading Review
Option
Trading – Calendar Spreads & Time Decay
When traders speak of putting on calendar
spreads, they normally refer to buying the further month options and selling the closer month option. While I can not argue
with this, it is not best for all options.
I am going to be general in this article
because prices change and I don’t want to cause confusion. Delta Neutral Trading
For out of the money options, you might
want to consider doing the opposite. Buy the close month and sell the further
month. This is because the theta is advantageous to you if you are buying the
front month. The further the months are from each other, the more you have an
advantage. Also, figure out the price per day of the option. Which option costs
more and which is cheaper per day. You can find options that are equal distance
away in strike from the futures but one option is 3 times cheaper per day than
the other. Delta Neutral Trading Review
For the at the money options, the regular
calendar spreads are the way to go. For strike prices that are far out of the
money, the reverse calendar spread is better. One reason is the theta
advantage. Another is the price per day. Delta Neutral Trading
So keep your eyes open for out of the money
options and check their price per day and theta and compare them to different
months. If you are looking at different months, make sure that the month you
are thinking of selling, is the same amount of strike prices away or more from
the underlying, as the one you sell. Meaning, if you buy an option that is 5
strikes away from the underlying, the one you sell, should be at least 5 strike
prices away from the underlying. This is so if there is a big move, both
options will be in the money at roughly the same time. Delta Neutral Trading.
David Rivera has traded commodities and
options for one of the largest cash trading firms in the world. He has written
a course on futures options
techniques. Delta Neutral Trading.
