Re: [TheOptionClub.com] Selecting Calendars

 

Not quite.  You got the commission right:  $6.  But you forgot to multiply your option gain by 4, the number of spreads you bought:

$1.28 - 0.96 = $0.32 X 100 = $32  (cost and amount at risk)

$32 x 20% * 4 contracts - $6 (commish) = $25.60 - 6.00 = $19.60  target gain

So, you made $19.60 on a cost of $134 ($128 + 6)  in, say, 2 weeks, this works out to:

19.6 / 134 / 2 * 52 = 380% annualized return - NOT TOO SHABBY

even if this was over a month you'd have:  19.6 / 134 * 12 = 175% - STILL NOT TOO SHABBY

if you want a larger DOLLAR gain, you need more size (contracts)!!! :-)


Ben

---- Original message ----

Date: Tue, 20 Jul 2010 15:07:24 -0000
From: "WilliamF" <wnfletcher@hotmail.com>
Subject: [TheOptionClub.com] Selecting Calendars
To: OptionClub@yahoogroups.com

I have started to work on guerrilla calendars seriously. I have constructed a set of rules based on data from Sheridan and others.
I was looking at an Aug Sep WAG ATM calendar. The 29s are 96 cents for the front, and $1.28 on the back (these are bid and ask). So doing it one time costs me $32 a contract. A ToS round trip for 4 contracts is $6 at $1.50 a contract.

So if I set a target profit of 20% of my $32, that is $6.40. So after commissions I have a whole 40 cents left to spend on my celebration dinner!

Yet this trade follows all the rules that I have looked at - volatility, skew, front vs back prices, minimum short premium etc.

I suspect I need to trade a bigger underlying, but surely that should just be reflected in a "minimum cost per contract".

Does anybody have enough practice on these to have a rule they feel comfortable with?

Bill

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