Module 6.

6
Adjusting Calendar Spreads

Adjusting Calendar Spreads

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 Module 6.6
Adjusting Calendar Spreads
Review of The Calendar Spread
Debit Spread
Buy to Open the Trade
Long Call or Long Put is Placed Close to the Money (just in or just out) and Typically 45-90
Days or Farther to Expiration. This is our Primary or Money Making Option.
Short Call or Short Put is Placed in an Earlier Month of Expiration at Any Strike Price (same,
higher, lower).
Cost Basis or Net Debit of the Trade is the Debit of the Long Option Minus the Credit of the
Short Option
Max Risk = Cost Basis
Max Reward = Is Different in the Case of the Short Option Being Higher, the Same, or Lower
than the Long Option.
Good Target ROI is 20-30%
Good Target Time in the Trade is Under 6 weeks.
 Module 6.6
Adjusting Calendar Spreads
 Open the Trade Expecting
Adjustment for Wrong Direction Steady Directional
Movement
 Stock price moves in the
wrong direction.
 We roll our short option to
follow the direction of the
stock.
LP  Roll out to the shortest
expiration we can while still
SP
taking in more credit on the
new short option than what
we spent to close the old
one.
 Repeat with rolled, or new
short options.
 Module 6.6
Adjusting Calendar Spreads

SP

SP LP
 Module 6.6
Adjusting Calendar Spreads

SC

SC LC
 Module 6.6
Adjusting Calendar Spreads

SC SC LC

SC SC SC
 Module 6.6
Adjusting Calendar Spreads
Original Trade is a Call Calendar on CAT
Buy to Open Jan14 $90.00 Strike Calls - $3.75 Debit
Sell to Open Nov13 $90.00 Strike Calls - $1.80 Credit
Total Debit to start the trade - $1.95
Expectation is for a slow steady bullish trend.

Stock reverses and goes bearish.

Roll November shorts calls out, and down to NovWk4 $88.00 strike calls.
Buy to close the Nov13 $90 - $0.81 debit (this is added to our cost basis)
Sell to open the NovWk4 $88 - $1.72 credit (this is now subtracted from our
cost basis)

New cost basis for our trade is $1.04

Original cost basis $1.95
Debit for Closing Short Option +0.81
Credit for Opening Short Option -1.72
New Cost Basis $1.04
 Module 6.6
Adjusting Calendar Spreads
Same Trade with new cost basis of $1.04 is now a Bear Call Calendar

Stock Levels Out

Allow NovWk1 $88 Strike Short Calls to Expire Worthless
Remember, we have already counted the credit from this toward our cost
basis
Sell to open the DecWk1 $88 - $0.65 credit (this is now subtracted from our
cost basis)

New cost basis for our trade is $.39

Adjusted cost basis $1.04
Credit for Opening Short Option -0.65
New Cost Basis $0.39

This is probably a good time to set up a limit credit order to close the trade.
If you do this, you still want to add in the original sought after ROI. (.39 + .49 = $0.88)
 Module 6.6
Adjusting Calendar Spreads

Summary
1. When a calendar spread moves the wrong direction we can:
1. Roll our short option to follow the direction of the stock movement
2. Short addition options (calls or puts depending on your long option) at the
OTM strike closest to the price of the stock and repeat this each time they
expire worthless.
2. As you move your position, keep track of your cost basis and apply
the next short option credit to the adjusted cost basis.
3. Set up a new target exit and adjustment strategy and remember to
base your sought after profit on your original cost basis if you still
want the full profit in the trade.