Per a meeting with my new trading buddies, OptionsMonkey brought up this WMT call calendar so I thought I would give it a shot. This is my first calendar...
Notice how the stock stays within a range from 42.00-51.00 all year long, and the middle seems to be around 47.50. At the time I got into this trade, the stock was around $47.40. This is a perfect set up for a calendar since you are buying & selling at the same strike (just different months like a diagonal). With calendars, you want volatility to be less than 35% while for diagonals, you want it to be above 35% since that is a more directional trade.
The volatility today was around 29% so I am sticking with the calendar.
Or goal is to have WMT be close to 47.50 when we roll into March. This could happen anywhere within the few weeks before expiration. We are setting a stop loss on calendars for 50% loss since the stocks fluctuates so much and you don't want to get stopped out if you can help it. Therefore we are sizing the trade for max loss so I am doing 1 contract. You typically size for only losing 1% of total portfolio for calendars. This way emotions will not move in if I get stopped out.
I sold the Feb 47.50 call for $1.60 and bought the Jun 47.50 for $3.60 giving me a debit of $2.00
Total cost= $1,024.95 (5 contracts=1% of portfolio)
Stop Loss set to $1.00= $950.05 stop credit
If not called out I make: 1.60/3.60= 44% ROI in 4 weeks!
