• Trading 101: Looking at a Calendar Spread

    by  • September 24, 2013 7:55 am • Trading 101 with Peter Bryans • 0 Comments

    There are numerous ways to play spreads in the options world, and one of them is via a strategy known as a “calendar” spread.  This past Friday, 9/20, there was a notable trade that went off on the options exchanges on Dollar General (DG)–the discount store. The daily chart shows where the equity closed yesterday, 9/23.

    (courtesy of StockCharts.com)

    Trade Alert–a high-end subscription service that we use in our trading here at Schaeffer’s–indicated that the top trade in the options market was most likely a bullish calendar spread.

    Top Option Trades

    >> 10000 DG Jan14 60.0 Calls trade $2.45  MID

    >> 10000 DG Nov13 60.0 Calls trade $1.25  BID

     

    It appears that the top trade was a November-January 60-strike call calendar spread. The investor is making a bullish bet toward the equity–but doesn’t believe that DG will surpass the $60 mark by November expiration–November 16th to be exact.

    The November 60-strike calls were sold (to open) for $1.25 per contract, and the trade involved 10,000 contracts. The January, 2014 November 60-strike calls were then bought (to open) for $2.45 per contract–10,000 times as well. The result is a net debit of $1.20 (2.45 less the 1.25). The trader is paying a total of $1.2 million dollars ($120 x 10,000) for the potential to control 1,000,000 shares by January (100 shares per contract at 10,000 contracts).

    Looking at the break even level is simple—you take the strike price for January and add the net debit. In this instance, it would be $61.20. The best-case scenario, is that DG remains trading where it is now (right below $60) all the way through November—and then the shares take off for the remainder of the year.

    A calendar spread is a good way to trade around a bullish (or bearish ) bet when you are confident on direction and time. Perhaps this investor is anticipating something as the company’s earnings release is scheduled for the beginning of December.

     

     

     

     

    About

    Peter Bryans joined the Schaeffer's Investment Research trading team as a Trader in April, 2012. A graduate of the Fisher College of Business at The Ohio State University -- where he concentrated in Finance -- Peter previously held internships with an insurance broker and a wealth-management firm. In his current role, Peter trades a variety of our real-time option services and also hosts our "Options Apprentice" weekly webinar presentations.

    http://www.schaeffersresearch.com

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