How to salvage a Call Calendar spread that has gone wrong?

Discussion in 'Traders Corner' started by Michael Gonsalves, May 22, 2022.

  1. Michael Gonsalves

    Michael Gonsalves Member Staff Member

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    Because the markets were down/ sluggish, I implemented a Call Calendar spread with the long leg at 15900CE (30 June) and the weekly short legs (26 May) at 15900CE and 16000CE. When the market surged, I added one more spread at 16200CE (30 June) and 16250CE (26 May).

    The Break Even Point (BEP) is 16331. The CMP is 16266.

    [​IMG]

    However, it appears that owing to the Petrol reforms announced yesterday, there will be a GAP up on Monday, which will jeopardize the BEP and result in substantial losses.

    How can I salvage the situation?

    There are five possible solutions:

    (i) Add a new Call Calendar at 16500 and extend the BEP:

    This is the traditional way of adjusting. If I add a new Call Calendar, the BEP is extended to 16577 and I get some breathing space. Obviously, this is capital intensive.

    [​IMG]

    (ii) Buy Calls:

    The incremental loss on the Calendar spread can be offset by the incremental profit on the long calls. However, the risk is that if the market reverses, the long calls will start bleeding and worsen the situation.

    (iii) Sell Puts:

    This is also fraught with the same risk that if the market reverses, the Puts will show losses.

    (iv) Shift the short legs to the next week:

    One can keep the long leg untouched and shift only the short leg to the future week. This is optimum in case one does not have the incremental capital to add a new Calendar.

    (v) Shift the entire Calendar to the next week/ month:

    This method is suggested by Raghunath Reddy in a YouTube Video. He suggests that if the Calendar breaches the BEP, one can close the present Calendar and start a fresh one at the BEP.

    He has also shown that following this method yields an annual return of about 80%.

     
    Last edited: May 22, 2022
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