Calendarized Trades: Getting Paid to Hold Long Options

SLV

A calendarized trade on SLV involves buying a slightly in-the-money call in a back month and selling an out-of-the-money call in a front month. This strategy is designed to benefit from an increase in implied volatility, leveraging the higher vega of the back month option. The credit from the front month option offsets the cost of the back month option, making it easier for the trade to be profitable if the direction is correct. This is suitable for low volatility environments where volatility is expected to rise.

SLV

By selling front month options for a credit, the cost basis of the long call is reduced, making it easier for the trade to be profitable if the underlying asset rises. The speaker explains that this strategy involves balancing delta and extrinsic value, with the goal of reducing the cost of the intrinsic value of the long option. The trade is defined risk, with the long option offsetting the loss on the short option.

Calendarized Trades and Vega Exposure

Calendarized trades involve buying a further-dated option and selling a closer-dated option, creating a positive vega exposure. This is beneficial when traders expect an increase in implied volatility, as the trade benefits from higher volatility. The back month option typically has higher vega, making the net vega of the trade positive, though the magnitude is generally smaller than in strangles or condors.

Cost of Carry and Extrinsic Value in Options

The extrinsic value of an in-the-money call option is influenced by the cost of carry, which includes factors like time decay and interest rates. The extrinsic value of a call option is theoretically similar to that of a put option with the same strike price, but practical differences exist due to market conditions. Traders must account for these differences when evaluating options strategies.

Reducing Cost Basis Through Front Month Options

Selling front month options can reduce the cost basis of a long option, making it easier for the long call to be profitable if the underlying asset rises. The speaker explains that by selling front month options for a credit, the cost of the intrinsic value of the long option is reduced, effectively lowering the break-even point for the trade.

What is a calendarized trade?

A calendarized trade involves buying a further-dated option and selling a closer-dated option. This creates a positive vega exposure, which is beneficial when traders expect an increase in implied volatility.

TakeawayCalendarized trades are useful for traders expecting volatility to increase, leveraging the higher vega of the back month option.

What is the cost of carry in options trading?

The cost of carry refers to the expenses associated with holding an option, including time decay and interest rates. It affects the extrinsic value of an option and is a key factor in evaluating options strategies.

TakeawayTraders should consider the cost of carry when evaluating the extrinsic value of options and planning their strategies.

What is the goal of the trade described?

The goal is to reduce the cost basis of a long call option by selling front month options for a credit, making it easier for the long call to be profitable if the underlying asset rises.

TakeawaySelling front month options can reduce the cost basis of a long call, increasing the likelihood of profitability if the underlying asset rises.