How to defend a Calendar trade going bad
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Calendars are nice income vehicles as Dan Sheridan will say to you. They are income trades, but they have a flaw, they go bad occasionally and don’t behave they way you expected. You may have estimated the stock or underlying will not move that much and and it starts breaking out on either side up or down. There are 3 options at this point
1. Close the trade and take a loss and start again.
2. Place another calendar on the side being breached and stay with the trade for a while.
3. Buy some insanity hedges.
The phrase coined ” insanity hedges” has been around for a while and this is for those insane moments when you really don’t know what to do. This will give you enough time to think this through and take better actions and lower your losses to something manage able.
What we will be talking here, is about defending the calendar trade when get caught in an insane moves by the underlying. The market dives suddenly or rises fast enough and the position is suddenly underwater due to market direction. This will cut down your theta and or deltas to neutral or even positive, now it becomes a directional trade. Here is the video