By Josip Causic, Online Trading Academy Options Instructor
Last week during the Options class in Irvine, California, I was teaching the students a type of trade that has many different labels. The trade is known as a Calendar Spread, or as a Time Spread, or as a Horizontal Spread. However, when the class and I went to place the trade on the platform that we were using in the class, we noticed that TradeStation calls it not only a Calendar Spread but also that it specifies it as either a Calendar Call or as a Calendar Put. Regardless what the name is assigned by either Larry McMillan, or by the broker, or by the floor traders, it is in essence the same concept. The front month is being sold against a longer term option which was first purchased. This could be done with either calls or puts – simply buy the back month first and then sell the front month of the same option class and same strike price. On many platforms the transactions of buying the back month and selling the front month can be done simultaneously.
In this newsletter, I will visually illustrate how to place a Horizontal Spread trade on the TradeStation platform. The aim is to focus just on the multiple steps involved during the execution and this example is not a trade suggestion. Following are the steps involved in placing the trade:
The verbal representation |
The numerical representation |
Figure 1 |
Chart |
Figure 2 |
Expiry Month Choices |
Figure 3 |
All 4 panes displayed |
Figure 4 |
Strike Price Selection |
Figure 5 |
Place Order: Open |
Figure 6 |
Two Order Tickets |
Figure 7 |
Confirmation Ticket |
The reason why I have the chart as the first step is because it is the technical analysis that tells me where the buyers and sellers are located. On the chart below I have selected the 34 zone as a level of possible future resistance. My thinking is that most likely the first time the price action comes near that zone, the price will have a hard time breaking above it due to the fact that in the past the 34 zone was an area of congestion. For that reason, I am willing to sell the 34 for the front month. Nevertheless, I do not think that the underlying will forever stay at that level, so I am buying a longer term option. My forecast is that after the price action has cleared the 34 zone, my back month will increase in value. In other words, I am slightly neutral short-term on the underlying but in the longer term perspective, I am actually bullish.
Figure 1
The second step involves looking at the Option Station Analysis window for the listing of all the existing tradables. As could be seen from Figure 2, the choices given are Sep, Oct, Jan 2010, April 2010, and Jan 2011. Those are ALL the choices that the trader has on this particular product. Also observe that in order to place our trade, we need to make a change from Covered Call to Calendar Call before we can proceed.
Figure 2
The third step involves going to the View Tab and requesting the display of all four components of the Option Analysis window. In order to have that we must check off each of the following: Asset Pane, Options Pane, Spread Pane, and Positions Pane, as shown in Figure3.
Figure 3
The next figure shows the strike and month of expiry selection. The way TradeStation has these set up is that each of the blue lines listing the expiry months has a plus sign in front of it. By clicking on the plus sign the actual strike prices scroll down. On our Spread Pane we also have many blue lines with the plus sign in front of them. In the example, I have used October 2009/January 2010 – Calendar Call – Buy. As it can be clearly seen, when I made the selection of that particular spread with the exact strike price of 34, on the Options Pane both October 2009 as well as Jan 2010 were highlighted in brown. By having them colored in brown I can verify that I am looking at the right data prior to placing the trade.
Figure 4
The next step is placing the actual order. From the Spread Pane, we highlight the correct spread that we would like to place and then right click on it. Once the menu shows up, Figure 5, we need to move the mouse up to the very first line stating Place Order and then we are faced with two choices: (1) To Open Position or (2) To Close Position. In our case, we have selected the first choice.
Figure5
The moment we select, To Open Position, another pop-up appears on our screen in which we must specify the price that we are willing to buy at. In our case, we are attempting to buy the Jan 2010 for 2.70, and sell the Oct 2009 for 1.10. The difference of the two (2.70 – 1.10) is 1.60; therefore, we have to agree with that price in order to place this trade. The way TradeStation makes the trade agree with the pre-calculated price is by inserting the amount in the rectangle located next to the blank space for the Limit Price. Observe the two tickets next to each other and observe the difference in the two.
Figure 6
After we have filled in the Limit Price, the Confirmation Ticket pops up, Figure 7, giving us one more chance to verify our order prior to placing it. The ticket reads: Would you like to place the following order(s)? Notice that it also specifies the commission, which in our case is a dollar per contract and we have 20 of them.
Figure 7
In conclusion, I have visually presented the placing of a Horizontal Spread trade on TradeStation. In hindsight, it is easy to see that multiple clicks are required and this is often somewhat confusing for our novice options traders. My suggestion is that those unfamiliar with the platform use the simulator and make all possible mistakes on it prior to their live trading.
Have green trading.
- Josip Causic
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