CALENDAR SPREADS
1. Calendar spreads allow you to play a stock and profit between two separate breakevens.
2. You sell to open the "front month" contract [expiring sooner] and buy to open the same strike in the "back month" or further expiration.
3. They are short theta, meaning that they are paid from the passage of time since the front month is sold to open.
14 May 2021
Episode 3 - The PMCC (Poor Man's Covered Call)
PMCC BASICS
- A PMCC is buying a LEAPS (long term equity anticipation security; aka a contract with an expiration 8mo to 1yr+ out) and selling to open OTM calls in the short term against it.
- You want your LEAPS to have a .70 delta so you're buying them ITM
- You want your short term call to be .20 to .25 delta so that it has a low probability of making it ITM. If this call expires worthless OTM, you collect 100% of the premium.
- Some people sell weekly calls, some people sell monthly calls (30-45 DTE)
- Each time you sell a call and close it for a profit, you are effectively reducing the amount of money you paid for the position (experienced traders call this "reducing your cost basis")
- LEAPS should be bought in LOW IV ENVIRONMENTS
- Calls should be sold at a strike HIGHER THAN the strike of your LEAPS call, and above a resistance level/at the .20-.25 delta. (.30 if you're super bearish and think that will expire OTM)
14 May 2021
Episode 2 - Credit Spread Basics
CREDIT SPREAD BASICS
- Buy to open a further OTM contract, sell to open a more expensive closer to the money contract
- There are call and put credit spreads, but they work opposite of calls and puts. Selling a call credit spread (bear call spread) is bearish, and selling a put credit spread (bull put spread) is bullish!
- Credit spreads are neutral/directional trades, meaning you do not need the stock to move in a direction to make money. They will pay you as time passes even if the stock is chopping up and down. As long as the strike you SOLD TO OPEN is OTM at expiration, you collect 100% of the premium you sold the spread for.
- Credit spreads DO NOT experience theta decay and IV crush, theta and IV crush actually benefit us, and we look for opportunities to experience them!
- Credit spreads are best entered off of a reversal, but also in high implied volatility environments, 30-45 DTE (days til expiration)
- Be mindful of stocks that pay dividends, as you can be assigned early! This is called pin risk!
9 May 2021
Episode 1 - Debit Spread Basics
DEBIT SPREAD BASICS
- Sell to open a further OTM contract, buy to open a more expensive contract (either OTM or ITM) to pay a net debit
- There are vertical, horizontal, and diagonal debit spreads; this podcast is focused on vertical debit spreads, meaning that both the contract we bought to open and sold to open expire on the same day
- Debit spreads are directional trades, meaning you need the stock to move in the direction of your play (call debit spread - up, put debit spread - down)
- Debit spreads experience theta decay and IV crush, so be careful and never play them through earnings
- Debit spreads are best entered off of a reversal, but also in low implied volatility environments
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