In the previous article we told you about the idea of trading options on commodity futures with the help of calendar strategies. In brief, commodity futures are influenced by seasonal factors.
However, using calendar spreads in futures trading is attended with the same unpleasant issues like the necessity to trade the given asset directly, with placing stop-loss orders etc.
Fortunately, we came up with the idea of trading options instead of futures. Indeed, trading options with the help of calendar strategies is another story as compared to futures spreads. Moreover, some positive factors connected with seasonality can be inherited by option trading strategies, i.e. seasonal appreciation of one contract against the other, which gives option spreads another competitive edge. Once the seasonal factors fail, we are defended by time decay, which is profitable in this case.
So, last time we (the Option Trading Department of ) traded corn: a June option was sold while an August option was bought.
Let’s monitor the trade. The plan hasn’t worked so far as the seasonal downtrend is delayed (it should have started in early March).
The chart above indicates that the spread price has gone 10 points (or $500) up from the entry level. Now let’s have a look at the riskrofile of our calendar spread (it consists of 4 sold and 4 purchased options):
The paper loss is $200. Why is it a paper loss? If the price stays at this point at expiration, we will get some $2000 as a reward. If the seasonality does work, we will earn extra money.
