OFF – Options for Free

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Introduction to the investment strategy

This is an options strategy favored among many professional option traders. It is built around calendar backspreads, maybe more known as diagonal backspreads. The underlying instruments are US stocks. Every position consists initially of two legs; short a number of options in the front month, ATM or slightly ITM, and long a larger number of OTM options in the deferred month. The ratio between the number of options in the front versus the deferred month is typically in the range of 1:7 – 1:20, i.e. steep ratios. Most opportunities are found in call options. The spreads are done as credit spreads.

In terms of Option Greeks, the strategy has in general positive delta/gamma/vega and slightly negative theta, somewhat resembling a long straddle, capped on either side.

There are two really positive scenarios before front expiry:

  • If the price of the underlying has decreased significantly, the long deferred options are financed partly or fully by the short options, hence ‘Options For Free’.
  • If the price of the underlying has increased significantly, there is an unrealized profit in the position that is used for free long options going into the deferred period.

Portfolio composition – how are the positions determined?

All optionable US stocks are screened for opportunities. A Monte-Carlo simulation is run for every tentative position in order to determine the attractiveness of the position in terms of reward versus risk. The target is to have a high ‘Event P&L’ versus Maximum Risk and a high profit factor. The stocks that pass the screen are in general defensive stocks with an implied volatility below 25% p.a.

There are typically 5 – 10 open positions in every front/deferred pair.

Entry/exit – when are the positions changed?

Portfolio updates are determined on a daily basis.


The exposure is determined relative to risk. A risk budget is set for the portfolio and every position uses a part of the risk budget.

Risk Management

From the outset of every position the maximum risk of loss is established. This means that in every point in time it is known how much the portfolio stands to lose at worst.

There is an active profit taking mechanism that uses option rolls to capture and retain profits.

Results – what to expect?

The strategy rewards gamma patience and should over a market cycle produce a number of significantly profitable trades that far outweigh the frequent but small losses that occur.

It is particularly favorable to regularly adjust the risk budget with realized profits/losses.

Risk – which types of market environments are detrimental to the strategy?

The strategy experiences hardship, as can be understood from the Greeks above, in situations when the price of the underlying is stagnant and implied volatility decreasing.

Model portfolio size

The maximum risk per position varies over time and can be found in the position reports here. If you run a larger/smaller risk budget you merely trade proportionally larger/smaller positions.