Adjustment to SPX Income Calendar, Thursday May 15, 2014:
Convert SPX Calendar into a Double Calendar
As already indicated in the original post of May 13, an extension of the SPX Calendar into a Double Calendar would be used adjust the trade, should the market move outside of the 2/3-adjustment points under the tent. This happened in a strong sell off on Thursday, May 15, so that an additional SPX JUL/JUN14 1850 Calendar Spread was added, with 35/63 days to go until expiration:
BOT +1 CALENDAR SPX 100 JUL 14/JUN 14
1850 CALL @10.05 CBOE
Volatility was up at 13.64% at the time of the purchase and the IV percentile was at 23% (compare with 10% for the initial tent). Consequently, the cost per contract had increased to $1005 for the second tent, as compared to $955 for the initial tent. As shown in the P/L chart below, the Double Calendar spread is now nicely centered and Theta has doubled, so that time decay can do its work. The SPX Chart below shows horizontal red lines to indicate the new break-even zone of the Double Calendar from 1830 to 1915. Fibonacci clusters are also shown with support levels at 1860/1845/1825 and a target cluster at 1920.
Profit target / stop loss: generally my stop loss matches the minimum profit target, which is 1/3
of the Calendar max profit value. In this case the tent initially had a height of
$1420, so my stop was set around $400-$500 and my profit target in the same range. Note that these values stay the same after adding the second tent to the trade, i.e. after converting the Calender into a Double Calendar. Because you add more risk with the second Calender, your risk/reward value will worsen. However, at the same
time you have bought (through the added risk) a higher probability
trade, because now you have a wider range to be profitable. A higher probability trade does not mean that you will earn more, but that there is a higher chance you will meet your profit target. Good so !
