Calendar Spread Strategy For Dummies
Due to the fact that I was up about 100% on $WYNN calls, I decided to try and figure out ways that I can lower my cost basis on this play. So I decided to utilize the calendar spread strategy. Las Vegas Sands ($LVS) kind of shat the bed yesterday so I decided to create a hedge in case WYNN suffers the same fate
Basically a calendar spread is when you sell a call option normally at a higher strike price than the one you purchased closer to expiration using the call option with a expiration date further out as collateral. The reason I like this strategy is because WYNN reports earnings on August 3rd, three trading days before my $113 calls expire. So I decided to lower the cost basis of my option play by selling calls that expire a week before earnings.
As you can see I got filled to sell at an average of $53 per contract, and the total credit I received was $265.
I paid $500 for the original position in WYNN. Meaning that because I lowered my cost basis by selling a 5 calls for a total credit of $265, the cost of my total position is now $235. So if everything in the casino/Vegas industry went to shit in the next few weeks, I would only lose $235 rather than $500.
So what would be the best case scenario in this option play? What would be the worst scenario? And what would be an "OK" scenario?
The Best Case Scenario: WYNN doesn’t close above $114 next Friday, meaning I am not forced to sell the 8/6 contracts. But during the week of expiration, WYNN impresses with earnings and finishes the week at +$130, creating a 1700% return on investment if WYNN hit $130 a share and some insane numbers anywhere higher.
The WORST case scenario: WYNN doesn’t close above $114 next friday and it falls on earnings, meaning the entire option play was a FLOP. However due to the sale of pre earnings call options, my total loss amounts to $235 instead of $500.
The OK scenario: WYNN closes above $114 next Friday, lets say WYNN closed at $117. This would mean that the contracts I sold would be worth $300, or $1500 in total. So in order to cover my short on these calls, I would be forced to sell my $113 August 6th calls. Because these calls expire post earnings they would be worth significantly more than the calls I am supposed to buy back. Hypothetically, the calls would be worth $400 or $2000 plus the time value/ earnings move possibilities. So if I were to guess the calls would price in a move to about 121-122 after earnings. Meaning that each contract for example would trade at ~$850 and 5 contracts would have a value of $4,250. Because I would have to buy back the $114 calls, I would give up $1500 in profits. 4,250-1500=$2,750. Because I sold the short calls for $265, that bumps up the total equity to $3015.
Now back to the $500 initial investment, $3015-$500= $2515.
About 2.5K in profit from a $500 investment is a 500% gain. Not too shabby nor is a gain you should ever expect to make on a regular basis.
The point of this post is to explain how you can use volatility in options to your advantage to lower your overall risk. I fucking hate math but I like money. Put me in a calculus class and I will "off" my brains out. But this type of math is simple and fun if you’ve got nice gainz on your mind.
P.S mods I know nobody cares who I am, thank you Captain Obvious. I don’t want clout, I like money and I like WYNN’ing, literally typed this out so I’d be able to take my eyes off my portfolio for a few mins.
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July 22, 2021 at 10:57AM