Bearish Ratio Calendar Spread and How to trade this time spread directional with a little twist
As a quick refresher, or if you haven’t read my previous article, calendar spread is basically a strategy to make money from a sideway market.
In other words, even if market goes no where and while stock owners barely make any money, you as a trader can profit greatly and risk very minimal capital with this spread.
Calendar is constructed by selling near month and buying further month options with ratio of 1 to 1.
Oftentimes, this trades with short 30 days and long the month-after option. I highly recommend that for one of the reason I wrote on the ‘9 Must-Haves In A Profitable Calendar Spread’.
However, today I will present to you a way to modify this to get a double-potential to profit trade.
It is easier than it looks. By simply removing one or more short legs and/or adding one or more long legs, a ratio calendar spread is born.
Let’s have a look at an example here.
Apple (AAPL) on Sep 2nd 2008 was trading $166.19 on a sideways pattern but the prediction was a bearish move to the downside with the market. Anyone could remember that time in history when the market was about to blow up.
So, I put on a 17days to expire ratio calendar put spread on AAPL and the trade was as the following:
- Buy 10 AAPL Oct08 165 Put for $8.8
- Sell 8 AAPL Sep08 165 Put for $5.1
- Cost = Max Risk = $4720
- Max Profit = $28,279.80
- Profit where the point head = ~ $2700
IV was high but since I predicted the downwards move, I would have any problem with an IV rush. But as you can see a lot of profit potential to the downside. Number don’t lie, right?
If the stock continued to trade sideways, I would make some profit ~$2000.
Now, let’s have to look at what happened 2 days prior to the near month expiration.
AAPL crashed down to $127.83 + a HUGH surge in implied volatility and have a look at the risk graph.
$2400 in profit.
If time permitted, I believe we could make a heck more money. However, it was time to exit so this trade got closed there.
- Sell 10 AAPL Oct08 165 Put for $37.00
- Buy Back 8 AAPL Sep08 165 Put for $37.35
Ratio Calendar is fun and creative but keeps in mind, nothing is for free. Options trading is a balancing act. If you increase your reward, you have to take on risk too.
Either is time or directional risk. You have to be wise and decide yourselves.
Happy Trading,
Category: Calendar Spreads, Case Studies
