The following is the OptionBT sighting of
"Calendar Spread Example (CSE)".
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"Calendar Spread Example (CSE)"
Position Description  :
Position taken   :
A little less than Five Months out,
Calendar Spread using Call Options for Debit,
Long the 05 June 1250 Calls (1150 cnt) and Short the 05 March 1250 Calls (1150 cnt),
No Margin required,
Short calls out of the money by 139 points (Close October 26,2004 was 1111.10).
March 18,2004 / Settlement(of the 05 Mar 1250 calls) = 1190.70
Credit or (Debit)   :
No Margin Required.
Net = $396,750
Comments   :   "Calendar Spread Example (CSE)"
"CSE" is a calendar spread virtuoso.
Some people might think that planning and executing
a successful calendar spread is akin to pinning the
tail on the donkey from forty yards out.
"CSE" has set the mark out in the area of 1250 on the SPX for March, 2005. If the SPX
move towards his mark then the June 05 1250 Calls will balloon and the March 05 1250 Calls
will not keep up.
One of the nice things about calendar spreads is that you don't have to wait long before
you find out who's the donkey. If you incorrectly guess the market direction
and the market moves away from your mark then you will have the joy of watching
your intial investment plummet. The good news is that you will not get a margin
call because your short leg is covered by the far month options. It is really
"set it" and "forget it" unless of course you care what happens to your money.
All the same, the calendar spread while being somewhat more protected than say a
straight long or short position offers enormous short term gains as in this example.
In fact "CSE" did get the market direction correct and it didn't take long before
profits began to accumulate.
(See the Updates below).
We want to thank "CSE" for this excellent example and wish he would tell us how he
knew what to do and when to do it. The results as shown below are nothing short of
"CSE" Update November 5,2004 : SPX close = 1166.17
If position closed at Current Value + $414,000 or up 76.6% of the
initial investment ($540,500) after only 10 calendar days.
"CSE" Update December 10,2004 : SPX close = 1188.0
If position closed at Current Value + $759,000 or up 140.4% of the
initial investment ($540,500) after 45 calendar days.
"CSE" Update Jan 04,2005 : SPX close = 1188.04
If position closed at Current Value + $851,000 or up 157.4% of the
initial investment ($540,500) after 68 calendar days.
End Game :
There were 5 days when the volumes support "CSE" exiting this position prior to
the expiration of the 05 Mar 1250 calls.
(these volumes are for the 05 Jun 1250 call, these net values are if both options are closed}
15Nov2004 with Vol = 1800 Net = $506,000
16Nov2004 with Vol = 4100 Net = $494,500
17Nov2004 with Vol = 1401 Net = $517,500
01Dec2004 with Vol = 1203 Net = $713,000
17Dec2004 with Vol = 2109 Net = $828,000
Of these if "CSE" got out on the 17th of December 2004, then
the $540,500 invested produced 153 percent gain during the two months that the position
However the rules are the rules and for a BigFoot to enter the BigFoot Hall of Fame then
he must hold the position until the expiration of the the near month.
In this case if "CSE" had closed this position using the COB bid and ask for the
17th of March of 2005 then he would have paid .05 (5 cents) ($5 per contract) to close
the expiring 05Mar1250 calls and recieved $8.20 (the bid) for the 05Jun1250 calls.
The result of all these transactions would have been +$937,250. The net overall with
a cost of $540,000 would have been $396,750. This is a profit of 73.5 percent.
This is measly compared to the more probable outcome noted above but still quite
The lessons here are many. The most important one is that for calendar spreads
you don't have to be exactly
on the mark in your prediction of the future, just the right direction.
Still it takes a lot of confidence to take .5M out of your pocket and
put it on the line and by demonstrating courage and wisdom "CSE" gets 5 stars.
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