Trading strategies involving options and futures contracts
In financea calendar spread also called a time spread or horizontal spread is a spread trade involving the simultaneous purchase of futures or options expiring on a particular date and the sale of the same instrument expiring on another date.
The legs of the spread vary only in expiration date; they are based on the same underlying market and strike price. The usual case involves the purchase of futures or options expiring in a more distant month and the sale of futures or options in a more nearby month.
The calendar spread can be used to attempt to take advantage of a difference in the implied volatilities between two different trading strategies involving options and futures contracts options. The trader will ordinarily implement this strategy when the options they are buying have a distinctly lower implied volatility than the options they are writing selling. In the typical version of this strategy, a rise in the overall implied volatility of a market's options during the trade will tend very strongly to be to the trader's advantage, and a decline in implied volatility will tend strongly to work to the trader's disadvantage.
If the trader instead buys a nearby month's options trading strategies involving options and futures contracts some underlying market and sells that same underlying market's further-out options of the same striking price, this is known as a reverse calendar spread.
This strategy will tend strongly to benefit from a decline in the overall implied volatility of that market's options over time. Futures calendar spreads or switches represent simultaneous purchase and sales in different delivery months, and are quoted as the difference in prices.
Calendar spreads or switches are most often used in the futures markets to 'roll over' a position for delivery from one month into another month. When trading a calendar spread, try to think of this strategy as a covered call.
The only difference is that you do not own the underlying stock, but you do own the right to purchase it. By treating this trade like a covered call, it will help you pick expiration months quickly. When selecting the expiration date of the long option, it is wise to go at least two to three months out. This will depend largely on your forecast. However, when selecting the short strike, it is a good practice to always sell the shortest dated option available.
These options lose value the fastest, and trading strategies involving options and futures contracts be rolled out month-to-month over the life of the trade.
For traders who own calls or puts against a stock, they can sell an option against this position and "leg" into a calendar spread at any point. For example, if you own calls on a particular stock and it has made a significant move to the upside but has recently leveled out, you can sell a call against this stock if you are neutral over the short term.
Traders can use this legging-in strategy to ride out the dips in an upward trending stock. Plan your position size around the max loss of the trade and try to cut losses short when you have determined that the trade no longer falls within the scope of your forecast.
This trade has limited upside when both legs are in play. However, once the short option expires, the remaining long position has unlimited profit potential. It is important to remember that in the early stages of this trade, it is a neutral trading strategy. If the stock starts to move more than anticipated, this is what can result in limited gains. As the expiration date for the short option trading strategies involving options and futures contracts, action needs to be taken.
If the short option expires out of the money, then the contract expires worthless. If the option is in the money, then the trader should consider buying trading strategies involving options and futures contracts the option at the market price. After the trader has taken action with the short option, he or she can then decide whether to roll the long option position. The last risk to avoid when trading calendar spreads is an untimely entry.
In general, market timing is trading strategies involving options and futures contracts less critical when trading spreads, but a trade that is very ill-timed can result in a max loss very quickly. Therefore, it is important to survey the condition of the overall market and to make sure you are trading within the direction of the underlying trend of the stock.
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 trading strategies involving options and futures contracts 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. From Wikipedia, the free encyclopedia. Energy derivative Freight derivative Inflation derivative Property derivative Weather derivative. Retrieved from " https: Options finance Derivatives finance.
There are four primary strategies we implement involving the writing selling of options. All examples are excluding commissions and fees. Uncovered, or naked writing, involves selling a call OR put without entering into an underlying futures contract. A naked call writer has a neutral to bearish view of a market, while a naked put writer has a neutral to bullish view on a market.
In most cases we recommend selling out-of-the-money options. This means selling a call with a strike price that is above the futures price or selling a put with a strike price below the futures price. In the case of a short call this premium is retained if, by expiration, the futures has moved lower, stayed the same, or moved higher but not up to the strike price of the call.
In the case of a short put the premium is retained if the futures has moved higher, stayed the same, or trading strategies involving options and futures contracts lower, but not down to the strike price of the put.
A short strangle is a strategy in which a trader simultaneously sells both an out-of-the-money put AND out-of-the-money call in the same market for the same contract month.
This is the optimum strategy for trading sideways markets. All of the premium which was collected upon the initiation of a strangle will be kept if trading strategies involving options and futures contracts underlying futures contract is between the strike prices on expiration.
Both options are out-of-the-money. A credit spread is a strategy that involves simultaneously selling an option and buying an option in the same month farther away from the market. The strategy is called a credit spread because the option that is sold has a greater value than the option that is purchased. Therefore, when a credit spread is initiated trading strategies involving options and futures contracts net credit is received.
Selling a credit spread is a limited risk trade. The maximum risk on a credit spread is defined by the value of the width of the spread minus the premium collected at inception. For the call, you pay 15 points. This loss would be realized if the market is above on expiration. The same type of trade can be executed on the put side.
Buy one closer to the money call or put and sell more than one deeper out of the money call or put. The contract size for Silver is ounces. Options Education Selling Strategies There are four primary strategies we implement involving the writing selling of options.