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Bonus Trade: Calendar Options – EEM June/Sept Double-Calendar
Broad-marked volatility continues to hover near six-month lows, and it’s reasonable to bet that it won’t go a whole lot lower in the near-term. With 39 days left until June expiration, this is a good time to open an early calendar spread. At about 30%, average implied volatility for the iShares MSCI Emerging Markets ETF (EEM) is currently near the bottom of its 12-month range. With EEM trading at about $147.50, we might trade a single strike of 145 or 150—but because it’s on the early side, we decided to go with a double-calendar, to give us a little more room for price movement. Our usual approach to a double-calendar would be to choose strikes equidistant from the current price (for example, 140 and 155). But if we did that right now with EEM, we’d end up with a slightly bullish bias. The March-to-May rally seems to have run out of steam, and with the traditionally weak summer season nearly upon us, we decided to bias this trade very slightly bearish instead, using the 150 strike on the upper spread. This still gives us 8-1/2 points to run (to break-even) on the up side, while leaving a nice 12-point cushion in case of a sell-off. EEM options are on the March-June-September-December cycle, so July expiration isn’t trading yet. Therefore, we had to use September on the back end, which makes for a higher net debit—but it also provides the opportunity to possibly role the short legs out for additional profit if the stock remains stable. Think of a double-calendar as an iron condor, only with the spreads between the long and short legs going horizontally instead of vertically. Were opening the following position: +2 EEM Sept 150 call Our break-even points are at about $135.50 and $156 on the underlying share price. Note that we trade a minimum position of two contracts, because adjustment may require splitting the position. Also note that EEM is not as liquid as the ETFs we typically trade with Condor Options (e.g., SPY or QQQQ), and the bid-ask spread is wider—so you might have to give up a few pennies to get filled. by CondorTrader (Condor Options) Disclaimer: Please note that charts and commentary provided by the moderator are for educational purposes only. Any trades placed upon reliance on the moderator’s charts or information is taken at your own risk for your own account. Past performance is no guarantee of future results. While there is great potential for reward trading stocks, futures and options, there is also substantial risk of loss and you must decide your own suitability to trade. Future trading results can never be guaranteed. This is not an offer to buy or sell stock, futures, options or commodity interests. Most trading systems are based on historical formulas which have worked in the past. However, what has happened before may or may not happen again. You can lose all your money trading stocks, futures, and options and you must decide your own suitability as to whether or not to trade. Only trade with true risk capital you can afford to lose. Only trade markets you can properly afford to trade. Properly funded trading accounts typically perform better than those that are not. Never risk more than 2-3% of your account on any one trade. Always define your risk before entering a trade and place a stop to limit your risk. There are no guarantees or certainties in trading. Trading involves hard work, risk, discipline and the ability to follow rules and trade through any tough periods during a system’s draw downs. If you are looking for a guarantee, trading is probably not for you. Most people lose money trading. One of the reasons is that they lack discipline and are unable to be consistent. A system can help you become consistent. Ironically, worrying about the monetary aspect of trading can contribute to and cause a trader to make trading errors. Therefore, it is important to only trade with true risk capital. |
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