Is there anybody who is trading systematically calendar spreads (or diagonal spreads) on weekly options?
The system is quite intuitive: you buy an option with expiration far away (5, 6, 7 weeks from now) and sell an option with expiration 1 week from now.
Strike can be exactly the same or with minimal difference (according to how much you want to risk).
Time decay for the option that is going to expire soon is much higher, so in case the IV is the same for all the expiration dates the premium for the weekly you sell could be 1/3 of the bought option, or even more, depending to market conditions.
When the sold option expires you sell another one with expiration 1 week, and so on.
If the price of the underlying doesn't change much, and IV keeps stable, usually 3 weeks are enough to earn back the premium paid for the bought option and 2,3, or more weeks are left to sell additional weekly options and make a profit.
The good:
- Max loss is set in advance, so no sleepless nights and no need for stop loss
- Max loss is limited to the first week. After only 2 weeks most of the risk is already gone
- Under determined market conditions, the system works well
The bad:
- The system is dependent to IV. In case IV falls sharply it's difficult to make a profit, so it's important to monitor and understand market conditions
- The system works only with extremely liquid underlyings, such as SPY, other ETFs and a few stocks
The reason of this thread is to see if somebody has actually traded this system in a systematic way (pardon the pun...) and for a long period of time, including difficult times, and ask his opinion on what underlying worked better for him and what performances were achieved in the long run.
In addition, anyone who is knowledgeable or interested and wants to add something is really welcome to join the discussion