Calendar Spread prior to earnings

Does anyone have experience with leap or long term calendar spreads? The only drawbacks I observed was the reduced liquidity and the bid/ask spread. Nonetheless the diverange cause by the Theta can be very profitable.

Specificially, I'm planning on entering a calendar spread about 6 months away, and ATM. Each month I'll proceed accordingly with a new spread six months away. For example, I would enter into a put and call calendar spread for Dec 08 & Jan 09 during this month. Next month I would enter into a put and call calendar spread for Jan 09 & Feb09...etc.

Unlike a reverse calendar spread, these are longer term plays. I still belive that it would be worthwhile incorporating RCs (strangle swaps) for earnings way OTM with 4 - 6 weeks to near month expiration.

Any thoughts...

Walt
 
leap or long term calendar spreads anyone???

Also, your views on entering a reverse calendar strangle swap on high IV stocks right before earnings, with a near term expiration???

Thanks,

Walt
 
Now you're talkin'. A so-called "reverse calendar" or short calendar, where you buy the front month and sell the back month is a good tool for an earnings play, and you can hold it through earnings.

It has a similar looking risk graph to a straddle *but* it can profit from the IV collapse that almost always occurs after earnings is released. A regular long straddle *has* to be exited before earnings or you suffer IV collapse.

Check it out. The only real danger is you have a heart attack before the long front month expires and don't have a chance to close the short back month. Then you have a naked short option with its associated large risk.
 
thanks Steve...

Have you entered into leap or long term calendar spreads before? Looking at the theta impact of how the spreads diverge over a few months, I'm suprised that not many people are discussing it...

Walt

Quote from stevegee58:

Now you're talkin'. A so-called "reverse calendar" or short calendar, where you buy the front month and sell the back month is a good tool for an earnings play, and you can hold it through earnings.

It has a similar looking risk graph to a straddle *but* it can profit from the IV collapse that almost always occurs after earnings is released. A regular long straddle *has* to be exited before earnings or you suffer IV collapse.

Check it out. The only real danger is you have a heart attack before the long front month expires and don't have a chance to close the short back month. Then you have a naked short option with its associated large risk.
More...
 
Thanks for your response IV Trader,

What are your thoughts on the concept of long term or leap calendar spreads? For example, selling a Dec 08 call ATM and buying a Jan 09 call ATM; as well as selling a Dec 08 put ATM and buying a Jan 09 put ATM. Am I missing something other than bid/ask spread widenen? Otherwise, it seems that this is a pure play... The idea is to enter several contracts like this each month. Within 3 to 4 months from now I would be able to start liquidating on a monthly basis.

If every 4 mths one can earn a $1 on the spread while alloting $5 for the debit spread, this equates to about a 60% ROI per year.

What am I missing...??

btw, what's "RV"?

Thanks,

Walt

Quote from IV_Trader:

Be very carefully with earnings reverse calendars this qtr (due to high/rising RV)
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Quote from jones247:

Thanks for your response IV Trader,

What are your thoughts on the concept of long term or leap calendar spreads? For example, selling a Dec 08 call ATM and buying a Jan 09 call ATM; as well as selling a Dec 08 put ATM and buying a Jan 09 put ATM. Am I missing something other than bid/ask spread widenen? Otherwise, it seems that this is a pure play... The idea is to enter several contracts like this each month. Within 3 to 4 months from now I would be able to start liquidating on a monthly basis.

If every 4 mths one can earn a $1 on the spread while alloting $5 for the debit spread, this equates to about a 60% ROI per year.

What am I missing...??

btw, what's "RV"?

Thanks,

Walt
More...

RV = Realized ( or Historical ) Volatility
 
Thanks,

I was only familiar with HV... any thoughts on the long term or leap calendar spread concept??? As much as ET is renown for constructive criticism, I'm surprised that nothing negative or any words of caution were offered... I guess the long term calendar spread must be a pure play...

Thanks,

Walt

Quote from IV_Trader:

RV = Realized ( or Historical ) Volatility
More...
 
I've read about LEAP diagonals based on ETF underlyings. You buy LEAPS a couple of years out and sell higher strike front months. The idea is that the market *on average* has a bullish of around 10% per year over the long run, hence the diagonal spread. In fact, the LEAPS are purchased ITM if I recall correctly.

I don't like them much cuz they tie up so much capital.
 
Hi Steve,

thanks for responding; however, I'm not planning on a diagonal calendar spread, but a horizontal calendar spread - long term or leap (i.e. Dec & Jan expiration dates). Depending on the pricing, I may enter a front month as little as 3 - 4 months away, especilly if the IV is much lower than the HV. The issue of having funds tied up for a long period of time can easily be managed by rolling and entering new trades each month after the 3rd or 4th month...

thanks,

Walt
 
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