Get Rich - Stay Rich - Investing for Monthly Income

Posts Tagged ‘calendar spreads’

Want To Create A Second Income?

Louisville, KY, October 28 2011 – Get Rich Investments, an online leader in helping individuals to create income producing investments, has a newsletter to guide investors seeking a second income.  This is one of the most valuable tools for investors to learn how to create monthly income from stocks and option strategies.

Does the idea of using an income investing strategy to create a second income every month on your funds appeal to you?  Get Rich Investments has created the Get Rich Monthly Income Plan to teach individuals how to create multiple streams of investing income.  This is a low-cost newsletter providing the following services:

    1. A list of CEFs (closed-end funds) that pay monthly dividends month after month. These investments can pay more than 10% annually and can sometimes be purchased at a discount to net asset value.
    2. A list of covered call trades consisting of high quality stocks such as the S&P 5-star research rating of the best stocks that are recommended as strong buys. These lists are updated each week with select trades added daily.
    3. Low risk investments to minimize market risk and to prevent your portfolio from taking a big lost in such uncertain market environments like we are experiencing today.
    4. We have created a strategy called the Blanket Put that will protect your investment from market downturns. The Blanket Put is your safety blanket to protect your portfolio from market downturns. This is worth the membership fee by itself.
    5. Access to multiple education resources to better learn how to be a more successful investor. Trades don’t end when you make a stock buy, sell a call, or complete the trade. Here we want members to be educated about how to manage a trade and when to take action.

The Get Rich Monthly Income Plan diversifies risk by seeking multiple streams of income. You can create monthly income by: covered call trades, covered LEAPS, calendar spread trades, monthly dividend CEFs and dividends from owning high quality, conservative stocks. That is 5 streams of income from this simple list as we focus on “cash flow” to the investor to improve your quality of life.

We have more than 20 years experience in the markets including trading covered calls and monthly income investments.  In addition, we have Masters in Business Administration (MBA) from a top business school and other experience in corporate finance and strategy.  We have authored several books including the original Get Rich – Stay Rich: Investing for Monthly Income that is currently on sale at Amazon and other bookstores around the world. It is important to you that your monthly income is in qualified, experienced investor hands who can be trusted to deliver the best trades.

Learn more about investing for income.

Monthly Income Plan Newsletter

Signup below to receive a free copy of the Monthly Income Plan newsletter for October 2011.  This report contains a market update, list of monthly dividend payers, covered call trades, protective puts and calendar spreads.  Subscribe to Monthly Income Plan.

 


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How To Trade The Calendar Spread for Income

A calendar spread, which is often referred to as a time spread, is the buying and selling of a call option or the buying and selling of a put option of the same strike price but different expiration months.  In essence, you are selling a short-dated option and buying a longer-dated option.  This means that the result is a net debit to the account.  In fact, the sale of the short-dated option reduces the price of the long-dated option, making the trade less expensive than buying the long-dated option outright.  Because the two options expire in different months, this trade can take on many different forms as expiration months pass.

There are two types of long calendar spreads: call and put.  There are inherent advantages to trading a put calendar over a call calendar, but both are readily acceptable trades.  Whether you use calls or puts depends on your sentiment of the underlying investment vehicle.  If you are bullish, you would buy a calendar call spread.  If you are bearish, you would buy a calendar put spread.

A long calendar spread is a good strategy to use when you expect prices to expire at the value of the strike price you are trading at the expiry of the front-month option.  This strategy is ideal for a trader whose short-term sentiment is neutral.  Ideally, the short-dated option will expire out of the money.  Once this happens, the trader is left with a long option position.

If the trader still has a neutral forecast, he or she can choose to sell another option against the long position, legging into another spread.  On the other hand, if the trader now feels the stock will start to move in the direction of the longer-term forecast, he or she can leave the long position in play and reap the benefits of having unlimited profit potential.

How to Find Calendar Spread Candidates

 • Check the current value of implied volatility (IV) and the history of IV over the past three to six months (free at ivolatlity.com).  Be sure the current IV is in the bottom quartile of recent IV history.

• Don’t trade a negative IV skew (if ≤ 2 points, maybe… but doubtful).

• Investigate very carefully if the positive IV skew is ≥ 4 points (suggests a big move is expected).

• Calculate the standard deviation (σ) for the candidate stock; use current IV and number of days to expiration of the front month option; look at the price range (lowest to highest) of the past week and the past month; avoid this stock if the recent price ranges are > 1 σ.

• Be sure no earnings announcements or other significant announcements are pending during the course of the proposed trade.

• Be sure you are selling > $0.40 of option premium (otherwise, commissions eat up too much of your profit).

• Calculate the breakevens (BE) using your trading software; you want a broad range between the BEs.

• Low IV stocks (12–‐20%) are conservative but require a large number of contracts; consider the effect of commissions.  Stocks with higher IVs (≥ 20%) present more price movement risk but have large premiums

Managing the Trade – Making Trade Adjustments

 • When you have traded calendar spreads for at least 6 months, you may consider adjustments. Until then, simply close the trade when the stock price hits a BE or the trade hits the stop loss you established. 

• Use the BEs or a price just beyond the BEs as your trigger.

• Close a portion of your contracts and place another calendar at or near the new price; determine the number of contracts to close and roll up or down by the number it takes to move your position delta back closer to zero.

• For example, IBM is at $172 and we put on 10 contracts of a $175 call calendar. IBM moves to $176 (our upper BE); we close 4 of our $175 calendars and open 4 $180 call calendars.  If we think IBM may move even higher, we might place the new spreads at $185.

• Don’t adjust a trade if you have < 15 days left to expiration (unless you have multiple months, e.g., you have a Jun Sep $175 call calendar; we close some or all of our Jun $175 calls, and wish to roll up to $180 but we only have 8 days to expiration; then you would sell the July $180 calls).

• Manage the new calendar spread just like the original trade (write down your management criteria).

In summary, it is important to remember that a long calendar spread is a neutral – and in some instances a directional – trading strategy that is used when a trader expects a gradual or sideways movement in the short term and has more direction bias over the life of the longer-dated option.   This trade is constructed by selling a short-dated option and buying a longer-dated option, resulting in a net debit.  This spread can be created with either calls or puts, and therefore can be a bullish or bearish strategy.  The trader wants to see the short-dated option decay at a faster rate than the longer-dated option.  The time decay is your income just like it is in the covered call trade.

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