Calendar Spread Vs. Iron Condor
Perhaps it Depends on Your Goal
Investors are always looking for ways to maximize their profits while minimizing their risks, and two popular strategies for doing so are the calendar spread using LEAPS and the iron condor. In this article, we will discuss the performance of both strategies, provide statistics, and explain how each trade is created.
The calendar spread using LEAPS involves buying a long-term call option, known as a LEAP, and selling a short-term call option with the same strike price. The goal is to profit from the time decay of the short-term option while holding onto the long-term option for potential gains. This strategy can be useful when an investor believes that the stock will not move significantly in the short term but has strong long-term potential.
The iron condor involves selling both a call option and a put option at different strike prices, while simultaneously buying a call option and a put option at higher and lower strike prices, respectively. The idea is to profit from a range-bound market, where the stock stays within a certain price range. This strategy can be useful when an investor believes that the stock will not move significantly in either direction.
To compare the performance of these two strategies, we will look at the statistics of each trade. For the calendar spread using LEAPS, the maximum profit potential is limited to the difference between the strike prices of the two options, minus the initial cost of the trade. The maximum loss potential is the initial cost of the trade. The breakeven point is when the stock price is equal to the strike price of the short-term option, plus the initial cost of the trade. However, utilitizing LEAPS, you can keep rolling the front month option up or down, depending on the market. Over time, you will collect theta and any difference between your long LEAP and the short call option *IF* the market is higher when it’s time to close the calendar spread. At this point, it would be a standard calendar with the front month and back month only being one month apart.
For the iron condor, the maximum profit potential is the initial credit received from selling the options. The maximum loss potential is the difference between the strike prices of the long options, minus the initial credit received. The breakeven points are the strike prices of the short options, plus or minus the initial credit received. Generally, you want to collect 1/3 the width of the strikes, which would put your trade between a 16 and 25 delta depending on the volatility of the underlying.
In terms of performance, the calendar spread using LEAPS tends to be a more conservative strategy, as the maximum loss potential is limited to the initial cost of the trade. However, the potential profits are also limited, but improved by rolling month after month.
If you decide to test the LEAPS calendar, consider buying the spread “In the Money”, so if the stock is at $100, you may want to buy the $85 or $90 leap calendar. If the stock goes up, roll the short month out and up. This can also be called a Poor Man’s Covered Call. It’s a little different, but the risk is minimized and can create a steady, continuous income.
In conclusion, the calendar spread using LEAPS and the iron condor are both useful strategies for maximizing profits and minimizing risks. However, each strategy has its own strengths and weaknesses, and investors should carefully consider their goals and risk tolerance before choosing which strategy to use.