How to profit from the cross calendar option strategy?
In order to form a cross calendar strategy, you need the trend direction. Or the price point above which the trend will be positive and price point below which the trend will be negative.
Why to take cross calendar option strategy?
In this situation the trend matured fully as anticipated by us but too quickly that too in the 1st day of the week. In this situation the future trend action is difficult to estimate. In this situation you are in a cross road where your trend destiny is not known to you.
Hence a neutral approach to take benefit of the short term trend action is desirable.
What is a cross calendar option strategy?
When the trader initiates a long straddle or strangle in the current month along with a short strangle in near month it is known as cross calendar option strategy.
Example: Buy nifty 7800 call option and 7800 put option of January 2016 expiry each one lot and sell 8000 call option and 7600 put option of one lot of February 2016 expiry. Combination of this two strategy is known as the cross calendar bull and bear spread.
How to form cross calendar option strategy?
In order to form cross calendar option strategy a thorough understanding of short term price trend is essential with open interest information of the option contract.
Example:I have already explained before about the 1SD trend of 1st week of January 2016 and how it performed on the day on the week. Now in order to form cross calendar option strategy we need to follow the below steps.
Step 1: Trend identification: Now in order to form the cross calendar bull and bear spread 1st I will take the 4th January 2016 close 7808 as my reference calculate the trend using the 1SD.
For the remaining part of the week (i.e. from 5th January 2016 to 8th January 2016) any price crossover above 7834 buy nifty future with stop loss 7782 for targets 7877-7896-7907-7946-7989.
Any fall below 7782 sell with stop loss 7834 for target 7739-7720-7709-7670-7627
Step 2: option interest observation: My observation on 5th January 2016 said the 8200 call option and 8000 call option having highest open interest. Same time the 7500 put option and 7700 put option having the highest open interest.
Step3: Trend and open interest relation establishment: if uptrend crossover happens then 7900 level is a possibility. If down trend crossover happens then 7700 is a possibility. However, the open interest says maximum support at 7700 and max resistance at 8000. At the time of drafting this article the nifty future was trading at 7790.
Hence buying a call option of nifty 7800 strike at 119 and 7800 put option at 130 in January 2016 expiry and selling 8000 ce February 2016 expiry at 95 and selling 7600 put option of February expiry at 104 each one lot will complete this strategy.
How to speculate on the strategy?
Fibonacci and 1SD trend provide excellent opportunity to speculate on the strategy. 0.618 retracement and 1.236 retracement price levels are key to our speculation. In the above trend calculation 7877 and 7946 corresponds to the above retracement levels in the uptrend and 7739 and 7670 corresponds to the above ratio on the down trend.
Now how to speculate? If nifty given the crossover of 7877 then close the 7600 put option short February and hold the remaining trades. Many times I have observe price swings in the band of 0.382 to 0.618 price range couple of times before giving the Fibonacci death zone (i.e. 0.618 to 0.786) crossover. Each retracement from 7877 to 7851(i.e. 0.382 retracement) sell 7600 put February 2016 expiry. In simple words when nifty touch 7877 close 7600 put February short and again re-enter 7600 short if price fall back to 7851.
If the retracement does not happen and the price manage to cross the 7946 level, then close all the trade in profit and come out. Similar way you can speculate on the 8000 call option short trade of February 2016 expiry if the price falls to 7739 level. This method of speculation is known as the speculate without compromising with the profit.
Any other similar strategy for this kind of situation?
Ratio call and ratio put strategy together also good at this situation. More on option strategy you will get from my book on Master key to future and option
Example: Buy 7800 call and 7800 put option each one lot and sell 7600 put and 8000 call option of the same month 2 lots. Yu can speculate in the same way as explained in the above section.
Conclusion: The success in option strategy trade depend on the careful understanding and the accuracy of the trend forecast. 1SD trend forecast technique is the most accurate one.
More on 22 option strategy for Indian market you can find on my book on Master Key to future and option