Today I would like to walk thru a trade I made using TD Ameritrade’s Think or Swim platform. I entered into a calendar spread on FAS, a triple leveraged ETF that tracks the Russell 1000 Financial Services Index. I bought the July 30 Put @ $3.40 and sold the Aug 30 Put @ 3.90. This resulted in a credit to my account in the amount of .50 per contract.
I entered the trade as a limit order which means that my order would only be filled if it met my requirements which in this case was that my trade result in a .50 net credit to my account.
My outlook on FAS is neutral to bearish in the short-term as it is trading near resistance in a downward sloping channel.

Moving Averages: The 5, 10, and 20 day are bullish.

MACD: Fast MA is bullish, while the slow MA is somewhat neutral.
 Stochastics: The 9, 14, and 20 day are all above 80% which is strongly bullish.
Relative Strength: The 9 day RSI is bullish. The 14 day RSI is technically bullish but is indicating weakness. The 20 day RSI is strongly bearish.
Money Flow Indicator: The 9 and 14 day MFI is still technically bullish but is indicating weakness. The 20 day is still bullish, but given the weakness in the shorter time intervals we can expect the 20 day to follow the trend.
Volatility: The Average True Range for the 9 and 14 day are identical while the 20 day is a little lower but they show bearish sentiment.
In total the technicals are slightly bullish but show weakness. For that reason I chose not to get into a trade that was extremely sensitive to direction.
Fas is trading in a range of $22.26-28.65 in the past 30 days and doesn’t look like it will break out of that range . It looks like FAS is headed toward the lower end of that range.

By entering the calendar spread I was looking to benefit from a near term increase in implied volatility, the benefit of time decay and price movement with my July put having a higher sensitivity to price movements due to the likelihood that my option expires at or near the current price.
My risk on the trade is limited to the credit I received ($500.00) as long as I cover my short before expiration of my long contract. My profit on the trade is dependent on how I decide to unwind the trade. I can choose to get out of both trades at the same time or I can cover my short and let my long ride. If I were to do that then time decay stops working in my favor and starts working against me. I also increase my risk to  the price action of the underlying.

With calendar spreads you should always cover the short option prior to the expiration of the long option. This is just simple risk management. And depending on your account type your brokerage may not allow you to do otherwise. I plan to close both contracts by Friday. I have a near-term price targets on the downside of 25.50 and 24.21. On the upside I will exit the trade if FAS crosses 28.41.

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