1 00:00:00,970 --> 00:00:09,059 [Music] 2 00:00:10,610 --> 00:00:12,900 what's up everyone welcome back to Mike 3 00:00:12,900 --> 00:00:14,700 and his whiteboard my name is Mike this 4 00:00:14,700 --> 00:00:16,260 is my whiteboard and if you're brand new 5 00:00:16,260 --> 00:00:18,510 to this segment we break down concepts 6 00:00:18,510 --> 00:00:20,279 and we construct them visually for you 7 00:00:20,279 --> 00:00:22,890 so we've got over 60 about 65 episodes 8 00:00:22,890 --> 00:00:25,050 now in the tastytrade archives so if you 9 00:00:25,050 --> 00:00:26,820 missed any of them definitely check them 10 00:00:26,820 --> 00:00:28,529 out at the top of tastytrade just go to 11 00:00:28,529 --> 00:00:30,810 fine shows scroll down to Mike and his 12 00:00:30,810 --> 00:00:32,369 white board and you'll see all of them 13 00:00:32,369 --> 00:00:34,590 there ranging from beginner option 14 00:00:34,590 --> 00:00:36,450 concepts to intermediate strategies 15 00:00:36,450 --> 00:00:37,620 we've got them all for you 16 00:00:37,620 --> 00:00:39,780 and today we're gonna step back a little 17 00:00:39,780 --> 00:00:42,239 bit and take a look at a beginner 18 00:00:42,239 --> 00:00:44,850 strategy and it's the calendar spread so 19 00:00:44,850 --> 00:00:47,219 we're looking at the calendar spread and 20 00:00:47,219 --> 00:00:49,289 different scenarios we might use this in 21 00:00:49,289 --> 00:00:50,520 we're gonna take a look at the risk 22 00:00:50,520 --> 00:00:52,410 profile graph we're gonna see how it 23 00:00:52,410 --> 00:00:54,750 works and what we can calculate from it 24 00:00:54,750 --> 00:00:56,430 so let's get right into it and we'll 25 00:00:56,430 --> 00:00:59,010 break down exactly how we construct a 26 00:00:59,010 --> 00:01:02,489 calendar spread so right here we can see 27 00:01:02,489 --> 00:01:05,670 that a set up in a calendar spread for 28 00:01:05,670 --> 00:01:08,070 an example we've got a strike price of 29 00:01:08,070 --> 00:01:11,189 100 as you can see here and basically a 30 00:01:11,189 --> 00:01:14,010 calendar spread is the combination of a 31 00:01:14,010 --> 00:01:16,470 long option in a further dated 32 00:01:16,470 --> 00:01:18,630 expiration with the combination of 33 00:01:18,630 --> 00:01:21,150 selling that same strike same option in 34 00:01:21,150 --> 00:01:23,880 a near term expiration so in this 35 00:01:23,880 --> 00:01:26,250 example we're looking at purchasing the 36 00:01:26,250 --> 00:01:29,850 April call at the 100 strike and we're 37 00:01:29,850 --> 00:01:32,909 looking at selling the Feb call against 38 00:01:32,909 --> 00:01:35,310 that on the same exact strike and what 39 00:01:35,310 --> 00:01:36,750 we're gonna find is that calendar 40 00:01:36,750 --> 00:01:38,820 spreads are going to be routed for a 41 00:01:38,820 --> 00:01:40,979 debit which means that the most I can 42 00:01:40,979 --> 00:01:42,930 possibly lose on this trade is the debit 43 00:01:42,930 --> 00:01:46,110 I paid for that so as we know with a 44 00:01:46,110 --> 00:01:49,320 long call the max profit is going to be 45 00:01:49,320 --> 00:01:51,960 unlimited to the upside we know that 46 00:01:51,960 --> 00:01:54,060 we're paying for this option so my 47 00:01:54,060 --> 00:01:56,310 breakeven point is going to be way over 48 00:01:56,310 --> 00:01:57,750 here it's not going to be really 49 00:01:57,750 --> 00:01:59,520 anywhere near the strike price because 50 00:01:59,520 --> 00:02:02,219 of the fact that if I pay for an option 51 00:02:02,219 --> 00:02:04,500 to hold that write to buy 100 shares of 52 00:02:04,500 --> 00:02:07,380 stock at a certain strike whatever I pay 53 00:02:07,380 --> 00:02:09,840 for that I have to add that value to the 54 00:02:09,840 --> 00:02:12,090 strike price to get my breakeven because 55 00:02:12,090 --> 00:02:12,780 at the end of 56 00:02:12,780 --> 00:02:16,200 day at expiration if I pay $5.00 for 57 00:02:16,200 --> 00:02:18,720 this option I need to sell this option 58 00:02:18,720 --> 00:02:21,630 for $5.00 to break-even on that trade 59 00:02:21,630 --> 00:02:23,310 and the only reason I can the only way I 60 00:02:23,310 --> 00:02:24,630 can do that at expiration 61 00:02:24,630 --> 00:02:27,120 is if this strike is 5 points in the 62 00:02:27,120 --> 00:02:29,160 money so in that example if I've bought 63 00:02:29,160 --> 00:02:32,220 the 100 call for $5.00 I would need this 64 00:02:32,220 --> 00:02:34,080 little blue thing the stock price here 65 00:02:34,080 --> 00:02:36,600 to go up to 105 so that's my break-even 66 00:02:36,600 --> 00:02:39,120 point but since I've got no cap to the 67 00:02:39,120 --> 00:02:39,660 upside 68 00:02:39,660 --> 00:02:41,910 I've got unlimited profitability with 69 00:02:41,910 --> 00:02:45,810 just this long call here however when I 70 00:02:45,810 --> 00:02:48,390 look at just a short call it's the exact 71 00:02:48,390 --> 00:02:50,970 opposite as you can see my profit is to 72 00:02:50,970 --> 00:02:52,650 the right on this strike bar with the 73 00:02:52,650 --> 00:02:54,959 long haul but my profit is to the left 74 00:02:54,959 --> 00:02:57,300 with a short call as we know with a 75 00:02:57,300 --> 00:02:59,850 short call we can profit to the tune of 76 00:02:59,850 --> 00:03:01,950 whatever we collected in premium for 77 00:03:01,950 --> 00:03:04,769 that so in this example I'm looking at a 78 00:03:04,769 --> 00:03:07,800 February call and regardless of what 79 00:03:07,800 --> 00:03:10,050 that value is my profit is going to be 80 00:03:10,050 --> 00:03:12,269 to the left of that strike bar I want 81 00:03:12,269 --> 00:03:13,980 that stock price to go down when I'm 82 00:03:13,980 --> 00:03:16,590 looking to sell the call and that's 83 00:03:16,590 --> 00:03:18,150 going to leave that call out of the 84 00:03:18,150 --> 00:03:20,489 money which is going to allow me to keep 85 00:03:20,489 --> 00:03:22,320 the credit I received as profit at 86 00:03:22,320 --> 00:03:24,480 expiration because as we know options 87 00:03:24,480 --> 00:03:27,030 cannot be exercised for anything other 88 00:03:27,030 --> 00:03:30,150 than intrinsic value at expiration so 89 00:03:30,150 --> 00:03:32,880 when we look at these two separately we 90 00:03:32,880 --> 00:03:35,340 can see the different basic profiles and 91 00:03:35,340 --> 00:03:37,799 the risk crafts associated with them but 92 00:03:37,799 --> 00:03:39,180 it gets a little trickier when we 93 00:03:39,180 --> 00:03:41,730 actually combine these two options so 94 00:03:41,730 --> 00:03:42,930 let's go to the next slide and we'll 95 00:03:42,930 --> 00:03:46,040 take a look at what that looks like so 96 00:03:46,040 --> 00:03:48,570 when you look at a calendar spread risk 97 00:03:48,570 --> 00:03:50,250 profile you're going to see a little 98 00:03:50,250 --> 00:03:51,480 something like this 99 00:03:51,480 --> 00:03:54,870 so we know that we paid a debit for this 100 00:03:54,870 --> 00:03:58,440 so my max loss is going to be down here 101 00:03:58,440 --> 00:04:01,709 so if you can imagine the verdict or the 102 00:04:01,709 --> 00:04:03,870 horizontal strike here as being our 103 00:04:03,870 --> 00:04:05,970 breakeven point we're looking at 104 00:04:05,970 --> 00:04:09,180 basically a profit or loss along this 105 00:04:09,180 --> 00:04:12,359 line as you can see my max profit is 106 00:04:12,359 --> 00:04:14,370 going to be received if the stock price 107 00:04:14,370 --> 00:04:16,589 is right around the strike price at 108 00:04:16,589 --> 00:04:19,140 expiration and it's going to be most 109 00:04:19,140 --> 00:04:21,690 important and most helpful if volatility 110 00:04:21,690 --> 00:04:23,729 in fact increases and we'll talk a 111 00:04:23,729 --> 00:04:25,409 little bit more about that in just a 112 00:04:25,409 --> 00:04:26,310 second 113 00:04:26,310 --> 00:04:28,590 but as you can see the risk profile 114 00:04:28,590 --> 00:04:30,630 graph flattens out to the right and 115 00:04:30,630 --> 00:04:32,760 flattens out to the left so we're going 116 00:04:32,760 --> 00:04:35,070 to talk a little bit about why that is 117 00:04:35,070 --> 00:04:37,710 so let's say the stock price ends up 118 00:04:37,710 --> 00:04:40,560 drifting all the way to the left so we 119 00:04:40,560 --> 00:04:42,570 would have two out of the money options 120 00:04:42,570 --> 00:04:44,780 both which would expire worthless 121 00:04:44,780 --> 00:04:47,760 however we did pay a certain amount for 122 00:04:47,760 --> 00:04:50,220 this option we paid a debit for this 123 00:04:50,220 --> 00:04:52,169 spread because we know that if I'm 124 00:04:52,169 --> 00:04:55,020 buying an option further out in time and 125 00:04:55,020 --> 00:04:57,480 I'm selling an option to reduce my cost 126 00:04:57,480 --> 00:04:59,580 basis against that regardless of 127 00:04:59,580 --> 00:05:01,560 whatever I'm selling this option for 128 00:05:01,560 --> 00:05:04,380 this longer option is going to have more 129 00:05:04,380 --> 00:05:07,200 value if we think about it in terms of 130 00:05:07,200 --> 00:05:10,350 life insurance or car insurance the 131 00:05:10,350 --> 00:05:12,750 longer time frame I'm insured for the 132 00:05:12,750 --> 00:05:14,880 more premium in total I'm going to have 133 00:05:14,880 --> 00:05:17,190 to pay for that it's the same thing here 134 00:05:17,190 --> 00:05:19,229 if I'm selling an option it's going to 135 00:05:19,229 --> 00:05:21,750 be worth less than another option I'm 136 00:05:21,750 --> 00:05:23,820 buying that has double the amount of 137 00:05:23,820 --> 00:05:25,560 time or triple the amount of time or 138 00:05:25,560 --> 00:05:27,510 whatever it is because of the fact that 139 00:05:27,510 --> 00:05:30,180 with the long option I have much more 140 00:05:30,180 --> 00:05:32,610 time to be correct and for that I'm 141 00:05:32,610 --> 00:05:36,270 paying more of a premium to do so so if 142 00:05:36,270 --> 00:05:38,610 the stock price goes all the way down to 143 00:05:38,610 --> 00:05:41,310 the left there we know that I paid a 144 00:05:41,310 --> 00:05:43,729 certain premium I paid a debit to 145 00:05:43,729 --> 00:05:46,650 execute this calendar spread so if the 146 00:05:46,650 --> 00:05:48,270 stock price goes down and these options 147 00:05:48,270 --> 00:05:50,640 are completely out of the money I would 148 00:05:50,640 --> 00:05:52,680 lose that value and that's the most I 149 00:05:52,680 --> 00:05:55,260 could possibly lose however if the stock 150 00:05:55,260 --> 00:05:57,090 price goes up it's a little bit 151 00:05:57,090 --> 00:05:59,580 different so we know that we paid a 152 00:05:59,580 --> 00:06:01,860 debit for this spread but if the stock 153 00:06:01,860 --> 00:06:04,289 price goes up too far it can in fact 154 00:06:04,289 --> 00:06:06,810 become a full loser and that's because 155 00:06:06,810 --> 00:06:09,450 of the fact that I've got the winning 156 00:06:09,450 --> 00:06:11,729 option here so my long haul would 157 00:06:11,729 --> 00:06:13,500 definitely show profitability on this 158 00:06:13,500 --> 00:06:16,110 trade however my short call at the 159 00:06:16,110 --> 00:06:18,660 expiration of this expiration is going 160 00:06:18,660 --> 00:06:22,320 to be capping my profits on my long call 161 00:06:22,320 --> 00:06:24,810 so we know that there's intrinsic value 162 00:06:24,810 --> 00:06:27,660 associated with in the money options so 163 00:06:27,660 --> 00:06:30,030 whatever my intrinsic value profit is on 164 00:06:30,030 --> 00:06:31,889 this call it's going to be offset by 165 00:06:31,889 --> 00:06:34,500 intrinsic value losses with this short 166 00:06:34,500 --> 00:06:37,530 call so the further away we go from the 167 00:06:37,530 --> 00:06:38,860 stock price on either 168 00:06:38,860 --> 00:06:41,199 side here is going to result in a loss 169 00:06:41,199 --> 00:06:42,759 so that's really important to understand 170 00:06:42,759 --> 00:06:44,949 with calendar spreads and that's why we 171 00:06:44,949 --> 00:06:47,199 consider these to be pure volatility 172 00:06:47,199 --> 00:06:49,270 plays so let's go to the next slide and 173 00:06:49,270 --> 00:06:51,069 we'll talk a little bit about how we can 174 00:06:51,069 --> 00:06:53,009 calculate some things with this spread 175 00:06:53,009 --> 00:06:56,409 so I've got some examples here with some 176 00:06:56,409 --> 00:06:58,990 prices so let's say I went out and I 177 00:06:58,990 --> 00:07:01,090 looked at the April calls and I'm 178 00:07:01,090 --> 00:07:04,210 looking at purchasing this call for $7 179 00:07:04,210 --> 00:07:06,039 as you can see it's just out of the 180 00:07:06,039 --> 00:07:08,229 money and I'm looking at selling a 181 00:07:08,229 --> 00:07:11,529 February call against that for $2 as you 182 00:07:11,529 --> 00:07:12,759 can see as we were talking about before 183 00:07:12,759 --> 00:07:15,340 the pricing and the Feb call is much 184 00:07:15,340 --> 00:07:17,259 less than the April call because the 185 00:07:17,259 --> 00:07:19,539 April call has more time associated with 186 00:07:19,539 --> 00:07:21,729 it and therefore it must be priced 187 00:07:21,729 --> 00:07:25,479 higher than that Feb call so the net 188 00:07:25,479 --> 00:07:29,469 cost here is a $5 debit if I'm paying $7 189 00:07:29,469 --> 00:07:32,439 in collecting $2 in premium to offset my 190 00:07:32,439 --> 00:07:35,139 cost basis and increase my probabilities 191 00:07:35,139 --> 00:07:38,860 on this specific trade then my overall 192 00:07:38,860 --> 00:07:41,919 result is going to be a $5 debit so 193 00:07:41,919 --> 00:07:43,659 let's take a look at the bottom rows 194 00:07:43,659 --> 00:07:45,430 here so we've got max profit lifts 195 00:07:45,430 --> 00:07:47,440 listed we've got our breakeven listed 196 00:07:47,440 --> 00:07:50,289 and we have our max loss so the only 197 00:07:50,289 --> 00:07:51,940 thing I have filled in here with this 198 00:07:51,940 --> 00:07:54,550 specific spread is the max loss and 199 00:07:54,550 --> 00:07:56,919 that's because of the fact that we have 200 00:07:56,919 --> 00:08:00,310 a long in April that has a different 201 00:08:00,310 --> 00:08:03,279 expiration than this fab option now if 202 00:08:03,279 --> 00:08:05,440 we were to look at the intrinsic value 203 00:08:05,440 --> 00:08:07,659 of both of these options at the Feb 204 00:08:07,659 --> 00:08:09,669 expiration we can probably come up with 205 00:08:09,669 --> 00:08:11,620 a rough estimate of what our max profit 206 00:08:11,620 --> 00:08:13,659 might be and what our breakeven might be 207 00:08:13,659 --> 00:08:16,089 but because of the fact that we're going 208 00:08:16,089 --> 00:08:17,800 to have this long April call at 209 00:08:17,800 --> 00:08:20,800 expiration especially if this February 210 00:08:20,800 --> 00:08:22,810 call expires out of the money it's 211 00:08:22,810 --> 00:08:24,699 really hard to determine our breakeven 212 00:08:24,699 --> 00:08:26,650 and Max profit so let's talk a little 213 00:08:26,650 --> 00:08:30,219 bit about why that is so if we've got 214 00:08:30,219 --> 00:08:33,099 our April call at the 100 site strike 215 00:08:33,099 --> 00:08:34,779 that we talked about before let's say 216 00:08:34,779 --> 00:08:37,240 the stock price is at 99 right there and 217 00:08:37,240 --> 00:08:39,640 we've got our February call on that same 218 00:08:39,640 --> 00:08:43,029 exact 100 strike let's say that implied 219 00:08:43,029 --> 00:08:46,839 volatility jumps up 20 percent so the 220 00:08:46,839 --> 00:08:48,250 stock price doesn't move at all but 221 00:08:48,250 --> 00:08:50,170 something has happened within the market 222 00:08:50,170 --> 00:08:51,760 and option prices are 223 00:08:51,760 --> 00:08:53,830 increasing for whatever reason which is 224 00:08:53,830 --> 00:08:55,300 going to result in an increase in 225 00:08:55,300 --> 00:08:57,460 implied volatility because at the end of 226 00:08:57,460 --> 00:08:59,350 the day implied volatility is just a 227 00:08:59,350 --> 00:09:01,030 reflection of what's happening in the 228 00:09:01,030 --> 00:09:03,520 option market prices if the prices are 229 00:09:03,520 --> 00:09:05,620 being bit up by a lot of activity and a 230 00:09:05,620 --> 00:09:07,690 lot of buyers of those options it's 231 00:09:07,690 --> 00:09:10,060 going to reflect in an increase in 232 00:09:10,060 --> 00:09:12,340 implied volatility and vice-versa is 233 00:09:12,340 --> 00:09:14,380 true if implied volatility is decreasing 234 00:09:14,380 --> 00:09:17,410 if we see that the IV is decreasing it's 235 00:09:17,410 --> 00:09:20,020 indicative of option prices decreasing 236 00:09:20,020 --> 00:09:22,120 as well so people might be selling a lot 237 00:09:22,120 --> 00:09:23,590 of those options as opposed to buying 238 00:09:23,590 --> 00:09:25,860 them regardless let's say our 239 00:09:25,860 --> 00:09:28,630 volatilities increase 20% but our stock 240 00:09:28,630 --> 00:09:30,820 price has not moved at all so what would 241 00:09:30,820 --> 00:09:33,790 happen at expiration well we would 242 00:09:33,790 --> 00:09:35,980 probably see a marked loss for sure on 243 00:09:35,980 --> 00:09:38,680 the February short call as we know if we 244 00:09:38,680 --> 00:09:40,510 sell an option at a certain value and 245 00:09:40,510 --> 00:09:43,450 implied volatilities increasing which is 246 00:09:43,450 --> 00:09:45,580 indicative of option prices increasing 247 00:09:45,580 --> 00:09:48,010 we're going to see a marked loss on the 248 00:09:48,010 --> 00:09:51,760 February option however at expiration we 249 00:09:51,760 --> 00:09:53,830 can exercise and the option is going to 250 00:09:53,830 --> 00:09:56,590 be worth the intrinsic value for one 251 00:09:56,590 --> 00:09:58,480 minute before expiration it's going to 252 00:09:58,480 --> 00:10:00,310 be trading for pretty much fully 253 00:10:00,310 --> 00:10:03,370 intrinsic value and as we know anything 254 00:10:03,370 --> 00:10:05,740 above the stock price with calls is 255 00:10:05,740 --> 00:10:07,960 considered to be out of the money why 256 00:10:07,960 --> 00:10:10,480 would someone buy shares at a higher 257 00:10:10,480 --> 00:10:13,330 price with a long call when they can 258 00:10:13,330 --> 00:10:14,830 just buy shares in the market for a 259 00:10:14,830 --> 00:10:16,690 lower price they wouldn't which is why 260 00:10:16,690 --> 00:10:17,920 it's considered to be out of the money 261 00:10:17,920 --> 00:10:20,710 so if we know that we'll see a marked 262 00:10:20,710 --> 00:10:22,510 loss if implied volatility increases 263 00:10:22,510 --> 00:10:24,340 throughout the life cycle of this trade 264 00:10:24,340 --> 00:10:27,370 in the fehb call what's going to happen 265 00:10:27,370 --> 00:10:29,950 at expiration all of that marked loss is 266 00:10:29,950 --> 00:10:32,380 going to disappear the Feb call is going 267 00:10:32,380 --> 00:10:34,330 to disappear as well I'm going to be 268 00:10:34,330 --> 00:10:37,060 left with that $5 net debit price but 269 00:10:37,060 --> 00:10:38,380 I'm also going to be left with a long 270 00:10:38,380 --> 00:10:41,320 April call worth a certain value and 271 00:10:41,320 --> 00:10:42,880 because of the fact that we can't 272 00:10:42,880 --> 00:10:45,010 predict what implied volatility will be 273 00:10:45,010 --> 00:10:47,440 and how that's going to affect this 274 00:10:47,440 --> 00:10:49,270 certain option because of the fact we 275 00:10:49,270 --> 00:10:50,860 can't predict the implied volatility 276 00:10:50,860 --> 00:10:53,170 we're not going to really know what our 277 00:10:53,170 --> 00:10:55,840 max profit is and because of the fact 278 00:10:55,840 --> 00:10:57,220 that we're going to have that long call 279 00:10:57,220 --> 00:11:00,100 and if our short call expires out of the 280 00:11:00,100 --> 00:11:02,350 money we're left with a long call with 281 00:11:02,350 --> 00:11:04,660 an unknown volatility value until we're 282 00:11:04,660 --> 00:11:05,260 actually 283 00:11:05,260 --> 00:11:07,180 at that point so we're not going to be 284 00:11:07,180 --> 00:11:09,220 able to really know what this call value 285 00:11:09,220 --> 00:11:11,200 is going to be worth maybe it'll be 286 00:11:11,200 --> 00:11:13,180 worth a little bit more maybe too much 287 00:11:13,180 --> 00:11:14,710 time would have passed where it'll be 288 00:11:14,710 --> 00:11:17,050 worth the same value but even in that 289 00:11:17,050 --> 00:11:19,510 case if I can go ahead and sell this 290 00:11:19,510 --> 00:11:22,030 call for $7.00 if it's worth the exact 291 00:11:22,030 --> 00:11:24,490 same value it's still a profitable trade 292 00:11:24,490 --> 00:11:26,290 because this feb call would have expired 293 00:11:26,290 --> 00:11:28,000 out of the money and worthless for two 294 00:11:28,000 --> 00:11:31,000 dollars I would have paid a $5 debit and 295 00:11:31,000 --> 00:11:33,250 now I can go back into the market sell 296 00:11:33,250 --> 00:11:35,230 this call for seven dollars and that 297 00:11:35,230 --> 00:11:36,880 would net me a two hundred dollar profit 298 00:11:36,880 --> 00:11:39,100 or a $2.00 profit in the options world 299 00:11:39,100 --> 00:11:41,170 so it's really interesting to consider 300 00:11:41,170 --> 00:11:43,270 what the possibilities are with calendar 301 00:11:43,270 --> 00:11:45,250 spreads but let's go to the next slide 302 00:11:45,250 --> 00:11:46,870 and we'll wrap it all together with some 303 00:11:46,870 --> 00:11:49,870 takeaways for you so the very first 304 00:11:49,870 --> 00:11:52,270 takeaway is super important and it's the 305 00:11:52,270 --> 00:11:54,670 fact that a calendar spread is an IV 306 00:11:54,670 --> 00:11:57,340 expansion play you'll see Liz and Jenny 307 00:11:57,340 --> 00:11:59,500 rout these a lot when the volatility in 308 00:11:59,500 --> 00:12:01,180 the markets and volatility and certain 309 00:12:01,180 --> 00:12:03,760 underlyings is really really low because 310 00:12:03,760 --> 00:12:06,640 we're looking for in IV expansion we 311 00:12:06,640 --> 00:12:09,070 want to usually get into this trade when 312 00:12:09,070 --> 00:12:11,860 an IV environment is super low that 313 00:12:11,860 --> 00:12:13,270 gives us the ability to have an 314 00:12:13,270 --> 00:12:15,640 assumption that IV might increase in the 315 00:12:15,640 --> 00:12:18,910 near future as we've shown that IV does 316 00:12:18,910 --> 00:12:22,900 have some mean reverting properties next 317 00:12:22,900 --> 00:12:24,760 on the list is put first call calendar 318 00:12:24,760 --> 00:12:27,340 spread when should I use one when should 319 00:12:27,340 --> 00:12:29,680 I use the other well for me I like to 320 00:12:29,680 --> 00:12:31,360 consider what I'm more comfortable with 321 00:12:31,360 --> 00:12:34,240 being out of the money so if I'm more 322 00:12:34,240 --> 00:12:35,440 comfortable with the stock price 323 00:12:35,440 --> 00:12:37,930 dropping and having my strikes be out of 324 00:12:37,930 --> 00:12:40,150 the money or stay around a range where 325 00:12:40,150 --> 00:12:42,190 I'm holding some call calendar spreads 326 00:12:42,190 --> 00:12:44,170 then maybe I'd look to do a call 327 00:12:44,170 --> 00:12:46,810 calendar spread or maybe if I assume 328 00:12:46,810 --> 00:12:48,400 that the stock price might drift up a 329 00:12:48,400 --> 00:12:49,900 little bit in the near term 330 00:12:49,900 --> 00:12:52,200 maybe I'll go with a put calendar spread 331 00:12:52,200 --> 00:12:55,720 the cost should be roughly the same when 332 00:12:55,720 --> 00:12:56,980 you're looking at the difference between 333 00:12:56,980 --> 00:12:58,780 the put versus call calendar spread 334 00:12:58,780 --> 00:13:01,060 while there is a volatility skew in most 335 00:13:01,060 --> 00:13:03,280 underlyings where the puts do trade at 336 00:13:03,280 --> 00:13:04,720 richer than calls when you're looking at 337 00:13:04,720 --> 00:13:07,180 just out of the money options it's still 338 00:13:07,180 --> 00:13:08,950 pretty going to it's basically going to 339 00:13:08,950 --> 00:13:10,600 be roughly around the same price so 340 00:13:10,600 --> 00:13:12,550 there shouldn't be any true arbitrage 341 00:13:12,550 --> 00:13:14,830 value there so really I would consider 342 00:13:14,830 --> 00:13:16,600 what you're more comfortable with in 343 00:13:16,600 --> 00:13:17,880 terms of being out 344 00:13:17,880 --> 00:13:20,190 money with whether that be calls with 345 00:13:20,190 --> 00:13:21,780 the stock price drifting down to the 346 00:13:21,780 --> 00:13:23,790 downside or with puts where the stock 347 00:13:23,790 --> 00:13:25,560 price might drift up to the upside of it 348 00:13:25,560 --> 00:13:28,140 and lastly IV change effects 349 00:13:28,140 --> 00:13:28,980 longer-dated 350 00:13:28,980 --> 00:13:30,930 options more I was talking about that 351 00:13:30,930 --> 00:13:33,630 marked loss in the February call but 352 00:13:33,630 --> 00:13:36,720 when we're looking at IV expansions yes 353 00:13:36,720 --> 00:13:38,880 we will see a marked loss on the 354 00:13:38,880 --> 00:13:40,920 shorter-term call because we sold it at 355 00:13:40,920 --> 00:13:42,840 a certain value in a low IV environment 356 00:13:42,840 --> 00:13:45,240 and if IV increases I'm probably gonna 357 00:13:45,240 --> 00:13:48,180 see a marked loss on that but since IV 358 00:13:48,180 --> 00:13:50,430 change affects longer-dated options more 359 00:13:50,430 --> 00:13:53,160 my profit that I would see on that long 360 00:13:53,160 --> 00:13:56,190 call is going to offset the short loss 361 00:13:56,190 --> 00:13:58,230 that I'm going to see on that short 362 00:13:58,230 --> 00:14:00,420 option so there's going to be a greater 363 00:14:00,420 --> 00:14:02,430 gain on the long option then I would see 364 00:14:02,430 --> 00:14:05,190 in my short option that I'm going to see 365 00:14:05,190 --> 00:14:07,050 a loss in so basically the difference 366 00:14:07,050 --> 00:14:08,490 between the two is going to create a 367 00:14:08,490 --> 00:14:12,960 profitable scenario if IV does expand so 368 00:14:12,960 --> 00:14:14,400 this has been an overview of a calendar 369 00:14:14,400 --> 00:14:15,720 spread thanks so much for tuning in 370 00:14:15,720 --> 00:14:17,340 hopefully you enjoyed it if you've got 371 00:14:17,340 --> 00:14:18,930 any feedback or questions that all shoot 372 00:14:18,930 --> 00:14:20,760 me an email at support at doe comm 373 00:14:20,760 --> 00:14:22,890 support at tastytrade comm or you can 374 00:14:22,890 --> 00:14:24,390 shoot me a tweet at tow trader Mike 375 00:14:24,390 --> 00:14:26,280 until next time we will see you again 376 00:14:26,280 --> 00:14:28,200 but we've got shadow traders up next so 377 00:14:28,200 --> 00:14:30,620 stay tuned 378 00:14:40,270 --> 00:14:42,330 you