[TheOptionClub.com] Re: Basic Calendar Question

 

--- In OptionClub@yahoogroups.com, "drrobhansen" <robhansen5252@...> wrote:
> I had heard either during a webinar or maybe in a magazine that calendar spreads are best put on with high priced stocks. Is there anyone that would explain to me why it would be advantageous? Or maybe I'm just mixing this up with some other strategy?

I don't know where you heard or read this, Rob, but I believe there's
something to it. I can think of a couple of reasons why you'd want to
stick to higher-priced stocks.

First, if the stock is cheap, the options will be even cheaper, and
you won't be selling very much time premium in the near month. In
order to put any reasonable amount of money into the trade, you'll
have to trade a large number of contracts, and the commissions may
reduce your profits substantially.

Second, lower-priced stocks tend to be more volatile. For a calendar,
obviously we want something that doesn't move too far from our strike,
while we sit back and let theta do its job.

FInally, it may not be a big consideration, but if you have a put
calendar, and you're still in the trade close to expiration, and your
short puts have very little time value left, it's possible that you'll
be assigned on some or all of them. It's much less of an issue right
now, with interest rates almost zero, but something to keep in mind
if/when they go up again. Assignment isn't a big deal, but it may
cost you some extra fees, depending on your brokerage, and some
short-term directional risk until you are able to close out the
resulting stock position. Again, the costs and risks go up if you're
trading lots of contracts, and/or a more volatile underlying.

MJ

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