adjustment for a calender spread

patefern · Feb 18, 2003

You put on a calendar spread with the stock at 27.50, the IV is 55. Sell the March 30 call for .90 and buy the April 30 for 1.35. By March expiration the stock is 28.50 and the IV has fallen to 35. You captured all the March premium, however your April 30 is less than .90. What could have/or can now be done to salvage the trade?

bungrider · Feb 18, 2003

Quote from patefern:

What could have/or can now be done to salvage the trade?

Not doing it in the first place.

Rule of thumb (I learned it from metoox): if it's in a book, it won't work.

Doubter · Feb 18, 2003

How much is the April 30 worth now at the bid?

theTaoTrader · Feb 18, 2003

One thing would have been done is buy April 31 call, instead of 30 call. The 31 call has vega and theta that are about 5% lower than 30 call's, lower both the time decay and loss due to volatility drop. With March 30 call and April 30 call, you are long delta (i.e. you over hedged) and vega, while with the March 30 call and April 31 call you are delta neutral and a lower vega. If you really believe IV will drop and want a flat vega, you can even go with April 32 call. But you'll have a negative delta. That could hurt if the stock has a big rally.

hardrock375 · Feb 18, 2003

You are assuming there exists both 31 and 32 Strike Calls. Although, I suppose it could be the QQQ.

qdz2 · Feb 18, 2003

One rule of thumb for adjustments that obviously works in pratice, sell to close deeper ITM positions and buy to open the least deep ITM positions.

patefern · Feb 18, 2003

Quote from bungrider:

Not doing it in the first place.

Rule of thumb (I learned it from metoox): if it's in a book, it won't work.

Options and strategies have been written about for a long time, are you saying don't trade any options, or only the strategies that have never been written about?

patefern · Feb 18, 2003

Quote from Doubter:

How much is the April 30 worth now at the bid?

80 bid

chisel · Feb 18, 2003

Quote from patefern:

You put on a calendar spread with the stock at 27.50, the IV is 55. Sell the March 30 call for .90 and buy the April 30 for 1.35. By March expiration the stock is 28.50 and the IV has fallen to 35. You captured all the March premium, however your April 30 is less than .90. What could have/or can now be done to salvage the trade?

You own the April 30s for .45 and they're .80 bid.

Why do you need to "salvage" a winner?

BobbyMurcerFan · Feb 18, 2003

I don't like calendars either. How can I know that a stock will stay in a trading range for 3 months? And if know it, doesn't everyone else too & isn't it factored into the options premium? I've done some calendars where yes, I've gotten all the premium on the option I sold, but I now have to find another option to sell again that has some value and will be somewhat hedged by my long option.

I know a lot of people who love these and swear they make money, so I'm not saying the strategy is a waste of time. I just haven't had much luck with it.

One strategy that a lot of people also like is doing calendar straddles where you sell the a realtively near month straddle and buy a relatively longer month straddle.