Weekly Options Trading Strategies – Calendar Spreads – San Jose Options

Do you truly understand Calendar Spreads? San Jose Options presents Weekly Options Trading Strategies with Calendar Spreads. Learn how to construct this trade and understand the true risk and reward involved. We talk about Theta and probability in this lesson while looking at a Calendar spread created with the SPX.

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How Safe Are Calendar Spread?

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Weekly Options Trading Strategies   Calendar Spreads

Video Transcript

Welcome to this lesson on weekly calendar spreads. Presentation by Morris from San Jose Options and I thank you for taking a moment to watch this class.

The deck that we’ll be looking at today is why would we consider to trade a calendar in a weekly time frame on the cash-settled indexes such as the Russell or the SPX. We’ll be analyzing this trade, looking at it very closely and comparing the probability, looking at the risk-reward and factors such as that. As a bonus, we’ll also be talking about the safety zone and we’ll deeper your understanding of theta and learn how well this Greek can actually protect your option spread.

Weekly calendar spreads can be a quick means to high returns but is the risk really worth the reward? If you’re able and willing to sit in front of your computer screen all day long during the live market, then this strategy might be for you. However, if you prefer to go out to lunch one day, you might just find that you just ate the most expensive meal of your life. In other words, a calendar has good theta but with many option strategies you’ll find that if you maximize your theta position, you’re actually maximizing your risk even more. The calendar spread is one of them. When we take this trade, the calendar, and we move it in form a month to only one week. Sure, we’re going to raise that theta and maximize it but we’ll take a close look at what we’re really doing and we’ll notice just how much we’re actually maximizing the risk. Just take a closer look.

The first step we have is just to set up the trade. If you don’t understand what a calendar spread is, simply put what you’re doing is you’re selling a strike, which is close to the money, on a short term time frame. In this case, we’re looking at about a week out. Then you go a month out or even farther out in time and you buy the same strike. And then you have a balanced number of contracts. Now, you can also go farther out in time. If you were to go farther out in time with your long contracts, just understand that farther out in time that they’re not as volatile. That would be a completely different discussion but when they’re up closer to expiration, if volatility goes up, dramatically, for example on the VIX, then those ones will get hit harder. If they’re farther out in time then they don’t sustain near as much damage. If you happen to have a long strike, then again, farther out in time, it may not go up as much in value as it will short term. You have to think about these terms whether it’s a short strike or a long and place them through different dimensions of time, accordingly to the effects of volatility.

Let’s look at the probability of this trade. So I drew in the graph and it looks very similar to the same that you’ll see in the software and we can look at that, perhaps, later. But what you have here is a trade that can make very little compared to what it can lose. You could actually lose about 3-4 times as much as you could ever make. Now, the most you could ever make is right at this point. So, the likelihood of that happening is very slim, for the underlying to be the same exact point one week later is very slim. The width here between the breakevens is about 43%. If you step back and look at this, you have a trade with a 43% probability of profit and you’re also looking at making maybe one but you could lose up to 3 times, maybe even 4 times as much. So, you don’t even have a 50% probability and much more width that you could ever make.

Let me go down here. If we look at the probability on this trade, we’ll see it has about a 43% chance of profit. If we look at the max return potential and the maximum risk, we can see it can lose 3 times as much as it could ever make. In fact, the odds of ever making the maximum on this trade are not likely to ever happen. Again, to make the max whatever you’re trading, the Russell, SPX, OEX, it can’t move at all. So that’s very unlikely. The safety zone in this trade is a very small portion of the total probability. In other words, you see how this trade start off, well, if it moved just this little bit here which is only about 1 1/2%. If it just moves right there, all of a sudden you’re in a risky trade, a risky position; very uncomfortable. We wouldn’t even consider this area safe or this area. If you want to really find point this safety zone, it’s really going to be in here which is only about 10-15 points in width, which is only about 20% of this whole zone. Your probability may be 43% but the actual reality is more about 20%.

Can the theta really protect this trade? As I mentioned before, you have a high theta because you’re bringing the trade in closer to expiration, so your theta’s higher on the trade. But let’s take a look ‘cause that’s what most appealing about this, it’s increasing that theta. With a 10 by 10 contract with SPX, we’ll have a theta of approximately $385 per day. Right at this point, if SPX hasn’t moved, then you should make about $385 overnight but that’s only if volatility doesn’t change. So, if nothing changes in the market and that’s unlikely to happen.

However, to many novice option traders that looks great, $385. All they look at when they construct their trades is theta. But if you take time to look at the risk involved which you normally learn how to do after losing an awful lot of money, most option traders after a year or two, then they start to look at the risk. But when they first start, they really just look at the theta. But let’s look at the risk. If SPX moves just 3% in one day, this trade will be behind about $4,500. That’s only 3%. Now the SPX, again any experienced option trader knows SPX can move 3% in a day, Russell can, NDX can, they all do. It’s just a matter of time. They all move that much in one day. Can the SPX move 3% in one day? Sure it can. Remember, the market dropped 10% in a matter of minutes over the flash crash.

In this example up here, I’m just looking at a 3% move which happens quite often. You would be behind 4,500. Now, your theta is only 385 per day. How’s this amount of theta going to protect this trade? It can only protect the trade right in this little zone right here. Imagine, if you happen to be trading this style, when you have a flash crash. We had one once before. Obviously, it can happen again. This trade, 10%, would move it all the way over here and it would be down 13,000. It would actually lose the full investment. If this is one of your strategies, you could lose your whole account in just a matter of minutes when you put this trade on. That’s just reality. Can theta, on this short term calendar, protect the trade? Well, I’ll leave that up to you. I’m just showing you the facts.

Some final thoughts here. Although weekly trades seem very appealing to some option traders, obviously not to all but we get enough calls about this so I figured I would give a little tutorial on them, they can be very dangerous to trade. It’s important to understand that theta cannot protect an option spread from risk. Theta is the Greek that gets most option traders into trouble when it’s their only focus on architecting a trade. In other words, nearly all option traders out there, from what we find, is that the only Greek they know and understand at all is theta and they structure all of their trades around theta. They ignore the gamma, the delta and the vega. If you only focus on theta, you’re going to be constructing some trades that have an awful lot of risk so make sure you learn the other Greeks and learn how they work as well.

In order to trade weekly calendars, you most likely be stuck watching your computer screen all day long. If we face another flash crash, then you’ll very probably lose 100% on the trade. If this is your primary trade that’s in your portfolio, then you could very well lose everything, your whole account, by doing this.

Final statement here, trading weekly calendars is not a way to trade options as a business, it’s a pure gamble. It’s important to understand the risk involved before attempting to use this strategy. I hope I pointed some things out in this video and help you understand. if you’re really considering doing this, make sure you always look at the risk involved and do the what if, because the what if will happen sooner or later. You may have a few good trades, you may not. It could happen on your first one but just because you have that theta maxed out to 300 or whatever it’s at, just be aware as the market moves around, that theta’s not going to protect that position.

I hope you enjoyed that and we’ll be talking to you soon. For more information on a safer way to trade options, don’t forget to visit our website. This has been a presentation by San Jose Options on weekly calendar spreads. Our address is www dot sjoptions dot com ( If you’re looking for a safer way to trade and a different way, something different that you won’t find in our competitors courses then visit our website, check out our free videos and if you’re serious, interested and ready to take advantage of what we have to offer, then please give us a call. We’ll be glad to give you demonstration or talk to you before joining. Thank you very much and you have a great day!