In previous articles, ” Recession Proof Covered Call Investment Strategy” & ” Recession Proof Covered Call Strategy Results for August 2006 “, we outlined a “recession proof” covered call investment strategy. In this article we perform an analysis using the “recession proof” stocks as outlined in the other articles but using calendar spread options instead of a covered call investment strategy.
Many investors have heard the calendar call spread siren and after a meeting with the beast left a lot poorer. Basically, the calendar options spreads strategy is similar to the covered call investment strategy, but instead of purchasing stock an investor purchases long calls expiring several months in the future. The long calls significantly increase the leverage of the position, i.e., potential upside is increased with the increased leverage, but the potential downside is also increased with the increased leverage.
Using the recession proof stock symbols and PowerOptions new SmartHistoryXL Back Testing tool we analyzed the results of a calendar options spreads strategy by searching for and selecting positions on July 24, 2006. The short portions of the calendar options spreads were all selected to expire on August 18, 2006 (August options expiration day). The results of the back test are shown below:
| SmartHistoryXL Selection Parameters | Greater Than | Less Than |
| Dwnsd. Protect | 5 | |
| Option Volume | 0 | |
| Prev Option Volume | 0 | |
| Delta Ratio | 2 | |
| Debit/Strike Diff Ratio | 1 | |
| # Strikes | 1 | 1 |
| Near Option Expiration Time Frame | July | |
| Far Option Expiration Time Frame | All Months | |
| Far Option Days to Expiration | 120 |
| Results for Calendar Call Spread search on July 24, 2006 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock Sym |
Stock Price 7/24/2006 |
Short Opt Strike Mo. |
Short Opt |
Short Opt Bid |
Long Opt Strike |
Long Opt |
Long Opt Ask |
Stock Price 8/18/2006 |
% Ret. |
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| ERTS | 45.72 | 06-Aug-50 | EZQHJ | 0.45 | 06-Dec-45 | EZQLI | 4.80 | 51.59 | 58.60 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| POT | 87.59 | 06-Aug-95 | POTHS | 0.85 | 06-Dec-85 | POTLQ | 9.80 | 98.50 | 45.30 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| UNH | 50.80 | 06-Aug-55 | UHBHK | 0.25 | 06-Dec-50 | UHBLJ | 4.70 | 49.04 | -29.20 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
# Successful positions: 2 out of 3 (67%)
Avg. % Return: 24.9%
Analysis
The average return of the calendar call spread strategy was a whopping 24.9% with a success rate of 67%. Even though the UNH position incurred a significant loss, it was more than compensated for with the other two positions, ERTS and POT, returning 58.6% and 45.3% respectively.
As usual the pundits would probably say “yes, but that’s only for one month”. Using the same selection criteria for stock options expiration in the months of June and July exhibited a return of +6.2% and +22.9%, respectively. The June stock options expiration position selected by the search was WFC (+6.2%) and the July stock options positions selected were WGR (+40.2%), SYMC (-25.0%) and WFC (+53.5%), with SYMC being the only losing stock options position expiring in July.
However, the story may not over at this point, as each of the long call option positions can potentially be used to write another short call option, so even though SYMC was down -25% in July, successive stock options positions may recover a loss and potentially even be converted to a profit. It should be noted, for each month different positions were selected as the dynamics of the market change from month to month.
PowerOptions provides Internet based tools for analyzing stock options with specific search criteria and for finding potentially lucrative option income. For those seeking to execute a calendar call spread investment strategy for their personal portfolios, PowerOptions provides an Internet based search engine for finding potentially lucrative income producing calendar call spread options positions.
[tags]calendar options, calendar spread options, stock options, option income, investment strategy, covered call investment strategy[/tags]