 extrators and we are going to continue with our spreads video series and in a previous video in January we looked at spreads 101 we looked at verticals okay and we talked about how verticals basically took something like a long call which is infinitely profitable but that's not really ever the case of course but there is a big downside right there is a big risk and we talked about taking a trade like that and doing two things number one we want which is what we actually want is to reduce this risk right we don't want to risk a thousand dollars from the start we want to risk a little bit less and we can do that by selling a call which will eventually lower this risk from a thousand to maybe 500 and as a trade-off our potential which was infinite you know but never realizable is infinite it gets capped okay so there's a max to it so we won't make infinite profit we'll make a little bit less than infinite and then from there on it'll just go flat okay and what that P&L look like is this alright so we went down from a thousand to 700 okay so that's not that bad from a thousand to 700 so we're only risking 700 so 30% less and as a trade-off we get a cap in our infinite profit so instead of making infinite amount of money we're only gonna make $1,200 sounds good to me okay one of the big takeaways here is that this strategy allows us to play big names which are usually expensive and to play more importantly closer to in the money calls the closer to in the money the higher the delta the higher the delta the higher the probability the option will close in the money making you of course money so those higher delta options are obviously have a higher probability of ending up in the money but they are also more expensive so how do you deal with something like that well you take an expensive call such as this right look at how close the current price of 180 is to the 195 call that we're buying now that means that this is gonna be a very expensive call that's a thousand dollars so the way to reduce that risk is we take the vertical by selling a call right selling it after whatever this price is which is 205 so we still buy the 185 and we profit from the break even but only up to the 205 the sold strike okay but we're doing it with a lot less risk how much less 30% less all right so that was the beauty of verticals and keep in mind that verticals are directional okay just as singles they are directional and you can take a single and reduce its risk by 30% to 700 by making a wide vertical and as you tighten that vertical okay you actually get a lower entry you get a lower also profit but you get a lower entry okay so you can play with verticals but they're still very directional you still want that ticker to blow past that blow past that strike and you will make your money so okay that's great now what if we don't have a price target what if we're not exactly sure that this thing is going to blow past our strike right enter time spreads now time spreads are a little bit more neutral and if you tinker with them you can actually make them a little bit direction so when the market is choppy and it doesn't you know it's not necessarily bullish or bearish in any particular direction then that's the perfect time for time spreads like calendars and diagonals now what does that entail well when we look at verticals and single options or naked options we are relying on Delta to make the money for us Delta is how much the ticker moves the underlying security that is represented by that option if the ticker moves in a large direction whether up for calls or down for puts then Delta is what's going to make our options premium increase in value now if we're neutral then that means that Delta is off the table so who are the next two most likely candidates to play in an options contract like that well that's theta and Vega now where does that come in now theta obviously plays in with Delta as well theta is time right so how much your premium decays with time and as we have seen time decay is exponential the closer we get to expiry Vega is volatility okay so how sensitive is that option to the volatility in the market so there are a lot of market volatile events which obviously affect the price of an option okay so those are the two Greeks that we're going to be focusing on when we talk about time spreads okay so let's take a closer look at theta and Vega theta we saw in this chart before you know time decay starts out very slowly the farther you are from expiry and the closer you get to expiry the faster it decays and that's why you need bigger moves towards the end here if you're going to make a lot of money with these options you need smaller moves in this case if you're far from expiry but the problem is that you know if you buy options that are too far out that's more expensive that's why you'll see a lot of day traders dabble around around here you know five or three days to expiry or even zero days to expiry so but the higher quality trades are back here okay and that is also why spreads are so good for this because they're more expensive if they're higher quality okay so time is represented by theta or time decay is represented by theta volatility is represented by Vega and we know that there are a lot of events in the lifetime of an options contract all the way until it expires which can make that options price go up or down okay and those events represent what is what we call volatility okay there are things like upgrades and downgrades and inflation numbers and recession numbers and GDP or employment numbers which make traders nervous right and jittery and then all of a sudden they react and they usually overreact to these events and that is what causes volatility and volatility can also affect the price of an options contract okay so and keep in mind that the farther away from expiry you are the more of these events there are that can affect your options contract price alright so this is another before we get into the theory and the finally the example of time spread is this concept up here is is usually what most traders keep in mind because most traders buy options and that is well you buy low you sell high obviously okay so let's say that you're down here same as if you're buying the stock if you're buying a call you want to buy when that call is low and you buy it in at a hundred dollars and then it goes to 200 300 400 500 600 boom you sell high you made money okay buy low sell high that's the usual case or the more common case where when traders are looking at buying options whether it be buying calls if that ticker is going to the upside if you bought it at a hundred and the ticker goes up this way then you're gonna be able to sell it 600 puts work the other way okay you buy a put here at a hundred as it goes down you're gonna sell your put for 500 down here okay because puts increase in value as the ticker goes down and calls increase in value as the ticker goes up okay but in both cases your put is increasing in value your call is increasing in value both options are increasing in volume you're buying it low and you're selling it high that's how you make money everybody knows this this one is a little bit more counterintuitive and it has to do with shorts and all these you know fancy terms of shorting stocks which you can do but you can basically short options in this way and what you do is you sell high and you buy low because think about it it's the same thing when you're selling options what you want to do is you're up here you can buy a put and that put will increase in value as the ticker goes down or you could sell a call which up here look at this people who bought here at a hundred sold at 300 so this options contract up here this call is worth 300 you could buy it and expect this to go up or you could sell that options contract and expect it to go down if you sell it at 300 it's going to go down to 100 well if you already sold at 300 and you buy this at 100 then you're pro you're pocketing 200 bucks okay chronologically it's kind of weird because you sell first at 300 and then you buy at a hundred right but it doesn't matter you still bought at 100 so you can sell options right and be profitable if you sell high and buy low all right so what does all this have to do with time spreads well get this if you don't have a particular strike that you are expecting this stock to blow through then you're just expecting it to basically ping-pong right or pinball up and down up and down up and down up right until then it breaks through this is the perfect idea the perfect example of when when to use a time spread if you are a trader here at 190 for caterpillar and you are long-term bullish okay then you can buy a 220 even though it's at 190 right you can you can buy a 220 call but it's going to be expensive because caterpillar is an expensive stock and because you're going to buy it out long-term the longer the farther out you go the more expensive the call is going to be check your account your options chains right your option chains the further you go out in time the more expensive the options are so if you're going to buy them then it's going to cost you a lot of money so what do you do you want to buy that because that's the high quality high beta sorry high Delta 220 call okay it's very likely to be in the money because it's far out and because it's caterpillar and it's bullish and whatever but it's expensive it'll run you a thousand five thousand whatever many dollars well if you expect it to ping-pong you know from here to six months which is exactly what we did with caterpillar example well then guess what when this thing goes up right and it hits let's say the top of this channel you sell a call you sell it at a hundred and they expected to go back down and then you can buy that on that same call at 50 bucks so you pocket 50 okay and then you wait for this thing to go up when it hits that resistance again right you're still expecting it to chop sideways you sell another call this time it went higher so you might sell for 150 right and then it drops and it drops even lower so it drops maybe to zero right so you pocket 150 so now you have 150 plus the 50 you had before now you've pocketed 200 bucks right I expect this thing to go back up again you saw it 300 this thing dropped to 100 you pocket 200 now you've got 200 that's 200 that's 400 this does this again maybe you pocket another 300 that's 700 does it again maybe get another hundred that's 800 right and you've been basically rinsing and repeating okay every time it hits the top of your resistance whether it's a horizontal resistance or a dynamic uptrending resistance all right every time it hits the top of the channel the top of that trend line you sell a call against the one that you have out here selling calls selling options is dangerous unless you have a long call to go with it right it'll let you do that because if you have to if you get assigned on that sold call then you obviously have to deliver those shares where you well you can you can deliver them because you have an options contract that allows you to buy up here okay so that's the safety of diagonals of sorry of spreads but time spreads are even better because you can make money off of these little you know intermediary ups and downs and sell calls every time and make maybe 700 800 dollars and then by the time this thing hits you know it's it's wrap then you're gonna make 700 dollars you've already pocketed previously plus whatever you make up here or is if this thing doesn't you know ever break out of that channel then worst case scenario you have 700 plus here let's say that you lose 700 here then you break even you know but you're more than likely going to exit this trade before it eats away at your profits that you've already pocketed back here so that is exactly what time spreads do so let's look at some of the characteristics of each okay we're gonna compare the verticals we saw a previous month with the calendars and then we'll move into diagonals but calendars and diagonals are pretty much the same thing okay so verticals you buy an in the money expiration strike why because you're buying something that is high quality and you're offsetting it it's expensive and you're offsetting it by selling an out-of-the-money call and in the money the in the money call that you bought is expensive because it's high quality and the call that you sold is going to be out of the money which means it's delta is less which means it is less likely and less likely to end up in the money which is exactly what you want when you're selling an option okay and basically you sell it whenever you sell it as soon as possible whenever you make your profit you sell it you know you don't wait to expiry and then you leg into you can also leg into a vertical to lock in profit if a call that you had as I was already up 100% you can say oh you know what I'm gonna go ahead and sell a call against this that means that if this thing starts going down it starts going south then I'm gonna I'm gonna have a sold call to offset however much this ticker keeps going down a worst-case scenario when your sold call profits enough to offset what you've already made then your break even otherwise you can just let this thing ride so you can leg into it as a profit locking strategy and we'll cover an example of that in the future but basically that is how you put on a vertical how do you put on a calendar you you still buy that far dated which is the high quality expensive leg that you want or options contract that you want but you sell a near dated one out of again out of the money so that you can collect that premium and preferably keep the premium the difference is that in this case you want it to do you want that sold call to actually go to zero so as soon as that thing hits zero then you get rid of it otherwise you can just hold it if it's far enough from the strike price you can just hold it until it is 100% out of the money and then you go ahead and repeat that and that is the key once you're out of that short leg then you can just rinse and repeat okay so that is the the difference between the calendar and the vertical remember the vertical both of these have the same expiration date they just have different strike prices so expiration date arrives and you're automatically out of both of them in the calendar or diagonals in the time spreads because they have different times different expiration dates then you buy a very far dated high quality expensive in the money call or put you do with puts call and you sell these weekly calls against it and what you're going to be doing remember is when it hits the top you sell okay when it hits the top again you sell when it hits the top again you sell you sell you sell right and of course after you sell when it hits the bottom you buy back and you profit because you bought back lower you sell you buy it back down here you sell you buy it back here and then again down here and you keep going you sell and then you buy again down here and you can choose whenever you want to stop doing this whenever you think you've had enough money and in case you're thinking that this thing is about to take off or you have maybe you have earning seasons coming up and everything's looking positive or you have some good macroeconomic expectations and you're expecting this thing to rocket past that strike maybe here you know so then then you don't continue with this leg you just okay let's just leave it and then it'll rock it up once you sold once you bought back the call you sold up here then you let it run you don't sell another one you go okay and then you profit from your long call all right so that's the difference between the verticals and the calendars or diagonals which are the time spreads basically you're still buying that far out of the money sorry buying that far in the money high quality option and you're selling these out of the money near dated options just to let them go to zero so that you can collect that sold premium and then you just basically rinse and repeat all right so this is basically what if you could option strat just highly recommended to visualize these kinds of spread strategies this is the 180 call calendar okay and as you can see here the top one that is the June and the bottom one is the March okay so you're buying this 180 June which must be really expensive but you're selling the March call all right and the strikes are the same so this from June from March to June there's three months and basically three months times four weeks that's that's 12 weeks that you can rinse and repeat right you can go ahead and sell and then wait for it to go down and buy it at a lower price and then you profit it and then wait for it to go back up and then sell again and then do that 11 more times okay and the calendar profits only when you're it achieves maximum profit when you basically when you when your short call is at the peak here at whatever this the ticker price is wherever this peak is all right that's your zone or your area of maximum profit now that's very hard to hit if you go back to your verticals you'll see on a vertical it's a lot easier because you can profit all the way from here which was 192 all the way up to 200 you know 300 and you can still profit here okay so you can be off buy quite a lot and still be profitable in a vertical but with a calendar it's a lot riskier because look at this you know after a certain point below whatever this was which is must be the 180 right and this is the 160 anything from 160 and lower you lose and guess what anything above 210 and higher you also lose right you lose money so the thing is you want to make sure that you can rinse and repeat right many times so that you know even if you end up maybe here or here or here or there that you've done it enough times that you've built up this cushion of profits right so that's the calendar and you can make these a little bit more bullish so in this case we're moving it we're still on Boeing and remember that's trading at around 180 so it was trading at around 180 down here and here we basically we've done a calendar but the 195 is up here okay so this is the peak of maximum profit right and we are currently at this price at 180 so this is a calendar but it's a little bit bullish it has a little a little bit of direction okay we would expect this thing to move up closer towards the 195 as compared to this one where we are basically selling the 180 right as well as buying it because these are calendars they have the same strike price so in this case we would expect this to remain at 180 if we use our chart that we use for an example if it's trading at 180 and we sell a 180 calendar or diagonal okay if we sell a 180 time spread we are going to expect this thing to trade within a very narrow margin okay somewhere in here if we were to reach this this point in time here we would be losing a lot of money because guess what we're out of that 180 okay and then all of a sudden boom we're back up but then if we reach here then again we're not profitable we're losing money because we're out of that 180 okay that's this example here your short strike is at 180 if you move this short strike to the 195 as we did in this case well then that means that you're more than likely up here okay so this thing better end up closer to this area so that you can be profitable so that's the difference between a calendar that uses a little bit of direction okay your short strike is a little bit above the current price of 180 okay or if you are really expecting this thing to just chop around for a long time well then your short strike is the actual current price of the ticker okay or where you would expect this to chop so where would these you know where would something like this work well if you are expecting maybe a Fed announcement you know and everybody's unsure of where this thing is going to head then you know there's not enough bullish or bearish momentum in either direction and you can do a quick calendar you know and in and out in a few days three to five maybe seven days and this would just chop around right because there's no definite bias to the upside or to the downside and that's why a lot of these are played in earning season and you'll see traders play these close to the actual earnings okay because since the ticker is not expected to move a lot what is expected to happen is volatility to go up and why does that profit why does that benefit a calendar because when volatility goes up premiums go up and that means that a call calendar is going to go up in value especially if you have something like this this is ideal right for er you're here you're expecting this thing to move up as volatility goes up right and that is exactly when you would put on something like a call calendar okay so let's move on to diagonals diagonals are a little bit more directional okay and we're going to compare these really quickly um basically they're both volatility positive so they both increase with volatility as we have mentioned before and they're both um you know you're buying something that's far dated where there's more uncertainty which is why these are volatility positive okay so let's take a look at the PNL chart this is what that looks like okay so it's a little bit closer if you look at this a little bit closer to what the vertical spread chart looks like right and this is because we have uh switched our strikes and that should make sense to you because in a calendar i'm quickly going to jump back in a calendar in both cases the strikes are the same 180 180 bottom sold 195 195 bottom sold okay with a diagonal the strikes are different 165 195 well guess what that looks a lot like our vertical spread setup right 185 205 you're buying the 185 you're selling the 205 right that's the vertical if you go back to the diagonal you're buying the 165 you're selling the 195 okay so it should be similar what is the difference here well two main differences one of them is the expires are different from a vertical so you can do that whole rinse and repeat thing where it goes up you sell goes down you buy a back profit it goes up you sell goes down you buy back profit right you do that until until such time you feel comfortable enough that that strike is achievable and you let it go right and also because of the volatility okay these are these are so far out far dated you know this is june compared to them to the march sold options that they are volatility positive so there's a lot of events in between that can make these things jump up in value which is perfect for somebody obviously waiting to make money all right so that is the wrap up on calendars and diagonals uh this is uh these are the two you know charts that you could you should keep in mind when you're thinking about calendars and diagonals and again you should always uh uh time spreads keep in mind uh have different expires okay what they differ in the calendar and the diagonal is that the calendar has the same strike so it's a lot harder to hit so beware uh and the diagonal has different strikes so you can you know you can uh increase your zone of comfort if you will so that uh you know you don't have to stay glued to your screen every minute every hour every day you know you can come back in and check in on these every now and then and uh uh you'll surely make money even though it's not an infinite amount of money but it's still money all right so that is what I wanted to cover for time spreads if you guys have any questions drop them in the comments below don't forget to subscribe to our channel uh to get all the notifications of the latest videos and uh again DM me a lot of you have been DMing me about you know you want me to cover this topic the other topic go ahead and uh on my discord you could uh can touch on me my user is marcio cogo you can see that on the beginning of this video as well and you can DM me for whatever uh topics you want me to cover okay so I hope you enjoyed this video series on spreads and I'll leave a link here for the verticals um video which I mentioned earlier and uh I hope you guys really enjoy this and I'll see you next time have a great one