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Mixed Horizontal Calendar Spread on Units of XIU

Martin Noël
November 29, 2016
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Mixed Horizontal Calendar Spread on Units of XIU

 

Units of XIU (iShares S&P/TSX 60 Index ETF) closed the week at a price of $22.23, but this was shortly after climbing to $22.50. The RSI indicator and the stochastic oscillator are down slightly, after both giving overbought readings. Although nothing can be said for sure, this situation may indicate that XIU is about to enter a period of relative calm over the next few weeks, staying within a range bound by the peak level of $22.50 and the technical support level of $22.00 (see the following graph).

 

Daily Chart for XIU ($22.33, Friday, November 25, 2016)

 

Mixed Horizontal Calendar Spread on XIU Units

 

To make the most of this scenario, we will implement a strategy designed to turn a profit if XIU stays within a range of $22.00 to $22.50 per unit from now until expiration on December 19, 2016. To this end, we will set up two horizontal calendar spreads: one with call options and the other with put options. The combination of these two spreads can be called a “mixed horizontal calendar spread.”

 

Position

 

  • Sale of 10 put options, XIU 161219 P 22.25, at $0.17
    • $170 credit
  • Purchase of 10 put options, XIU 170120 P 22.25, at $0.39
    • $390 debit
  • Sale of 10 call options, XIU 161219 C 22.25, at $0.24
    • $240 credit
  • Purchase of 10 call options, XIU 161219 C 22.25, at $0.45
    • $450 debit
  • Total debit of $430

 

Profit and Loss Diagram

 

As can be seen in the above diagram, we will make the estimated maximum profit of $230 if XIU closes at exactly $22.25, the strike price, on expiry on December 19, 2016. Our position will be profitable if XIU stays between the two breakeven prices of $22.00 and $22.53. However, our position will generate losses beyond these two prices. Should this occur, we will respond by making some adjustments to the position. The advantage of including both call options and put options in our strategy is to be better placed to react if XIU does not move as we had expected. Should the price of XIU rise sharply, we can buy back the put options sold and then profit from a decline by selling our put options. Conversely, should there be a sharp drop in the price of XIU, we can buy back the call options sold in order to profit from a rally, after which we will be able to resell our call options. Over the next few weeks we will follow up on this position.

 

Good luck in your trading, and have a good week!

 

The strategies presented in this blog are for information and training purposes only, and should not be interpreted as recommendations to buy or sell any security. As always, you should ensure that you are comfortable with the proposed scenarios and ready to assume all the risks before implementing options strategies.

Martin Noël
Martin Noël http://lesoptions.com/

President

Monetis Financial Corporation

Martin Noël earned an MBA in Financial Services from UQÀM in 2003. That same year, he was awarded the Fellow of the Institute of Canadian Bankers and a Silver Medal for his remarkable efforts in the Professional Banking Program. Martin began his career in the derivatives field in 1983 as an options market maker for options, on the floor at the Montréal Exchange and for various brokerage firms. He later worked as an options specialist and then went on to become an independent trader. In 1996, Mr. Noël joined the Montréal Exchange as the options market manager, a role that saw him contributing to the development of the Canadian options market. In 2001, he helped found the Montréal Exchange’s Derivatives Institute, where he acted as an educational advisor. Since 2005, Martin has been an instructor at UQÀM, teaching a graduate course on derivatives. Since May 2009, he has dedicated himself full-time to his position as the president of CORPORATION FINANCIÈRE MONÉTIS, a professional trading and financial communications firm. Martin regularly assists with issues related to options at the Montréal Exchange.

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