Calendar Spreads on SPX vs SPY, decay wise

D

darp

With the SPY the longer term options are always worth more than the shorter ones. But with SPX the March Puts are worth a lot less than the September ones.

Some questions:

1. Since you can sell a Sept 170Put SPX for 232 and buy a March 170P for 213, does that mean the calendar spread has a credit (you get interest and just requires a tiny margin?

2. The reason for this is like Corn or Copper, the option is based on March Futures for SPX no the cash SP500. But does anyone here have experience on how the decay works. If prices stay stable, will the March options tend to gain while the Sept tend to drop in value (the latter would seem mandatory)?

If so the SPX would seem better for Cal Spreads than SPY.

3. Are there any free spread charts out there on this issue to see what has happened before on SPX Cal Sprds?

FYI for any knowledge on this
 
Quote from darp:

With the SPY the longer term options are always worth more than the shorter ones. But with SPX the March Puts are worth a lot less than the September ones.

Some questions:

1. Since you can sell a Sept 170Put SPX for 232 and buy a March 170P for 213, does that mean the calendar spread has a credit (you get interest and just requires a tiny margin?

2. The reason for this is like Corn or Copper, the option is based on March Futures for SPX no the cash SP500. But does anyone here have experience on how the decay works. If prices stay stable, will the March options tend to gain while the Sept tend to drop in value (the latter would seem mandatory)?

If so the SPX would seem better for Cal Spreads than SPY.

3. Are there any free spread charts out there on this issue to see what has happened before on SPX Cal Sprds?

FYI for any knowledge on this
More...
Because the SPX is a European style option the DITM contracts are subject to backwardation (check Google). Backwardation causes DITM Puts to trade below par and therefore time decay results in an increase in price.

The problem with your calendar spread is that time decay causes the Sept contract to increase faster than the March contract resulting in a loss at Sept expiration (everything else being equal).

Get yourself a modeling program that handles European style options and you can see this behavior clearly.

Don
 
Dons right the correct hedge for the SPX is the long dated future also. If you buy the long dated deep puts at what appears to be a discount to intrinsic value then to hedge the delta risk you buy the future so the cost to carry is in the future which off sets the perceived discount in the puts.
 
Don and Xflat,

Been looking at it more. If the SPX goes up to the strike the DITM Put Cal will indeed make a good profit (checked the ATM Sept-Mar)

But you are saying the backwardization(BKW) will get bigger at expiration if the SPX stays where it is.

My objective is the cheapest possible protection from the SPX going up. If not for the early exercise DITM P Cal SPY fullfills this very good, cheaper than buying OTM Calls. With SPX even cheaper a credit, but both of you are saying I think that with level or lower prices, the SPX BKW gets even bigger.

I am basically selling nearby SPX Calls OTM under strategy that even or down I win, and if it goes up slowly likely a profit too. If it goes up quickly the DITM P Cal would protect most of the loss on Short Calls.

Thanks for your comments, am new to SPX BKW. Lots of expertise here.
 
Quote from darp:

Don and Xflat,

Been looking at it more. If the SPX goes up to the strike the DITM Put Cal will indeed make a good profit (checked the ATM Sept-Mar)

But you are saying the backwardization(BKW) will get bigger at expiration if the SPX stays where it is.

My objective is the cheapest possible protection from the SPX going up. If not for the early exercise DITM P Cal SPY fullfills this very good, cheaper than buying OTM Calls. With SPX even cheaper a credit, but both of you are saying I think that with level or lower prices, the SPX BKW gets even bigger.

I am basically selling nearby SPX Calls OTM under strategy that even or down I win, and if it goes up slowly likely a profit too. If it goes up quickly the DITM P Cal would protect most of the loss on Short Calls.

Thanks for your comments, am new to SPX BKW. Lots of expertise here.
More...
re:"If the SPX goes up to the strike the DITM Put Cal will indeed make a good profit ".

Agree. Actually profit starts at roughly 1500.

re"But you are saying the backwardization(BKW) will get bigger at expiration if the SPX stays where it is."

No, I think BKW gets smaller for both contracts.

re"..........but both of you are saying I think that with level or lower prices, the SPX BKW gets even bigger"

No, I don't think so. I would say BKW is more related to time than SPX price. As I recall, BKW is related to the cost of carry which is largely a function of time.

Don
 
Will move to new title, SPX DITM Put Calendar Backwardation Vs SPY

In case others with Backwardation knowledge have not picked up on this tread is really ended up being about that.

The question is will a SPX Sep-Mar 1700 Put DITM Calendar Spread with the Mar being Long and Sep being Short gain or lose value if the SPX stays even thru Sept?

Have looked into it. Sept 1700 Puts are at 226 = 1474 and Sept SPX at 1473.70 so the DITM Put is trading at parity. And SPY is at 147.22. So Roughly its all at parity for Sep.

For March its 1495.90 for futures (my quote) and 208 for Mar 1700 Put, or 1700-208 = 1492, so indicates a small preminum and IB says its 14% IVol.

So the backwardation is in the Futures, with Options pegged to them ... but not for less than parity.

Thus it would seem IMHO that if the SPX stayed right at 1472.20 the 1700 Sep would be 226 +1.80 =$227.80 so a $180 loss in this case, which just may be a quote issue.

The March would reasonably lose 1/6th of their backwardization which is 23.20 now which would be 3.86 or $386 gain. So best I can figure the DITM 1700 Sep-Mar Put Calendar would gain 386-180 =$206.

Be most interested in comments on this.

TIA
 
Quote from darp:

Will move to new title, SPX DITM Put Calendar Backwardation Vs SPY

In case others with Backwardation knowledge have not picked up on this tread is really ended up being about that.

The question is will a SPX Sep-Mar 1700 Put DITM Calendar Spread with the Mar being Long and Sep being Short gain or lose value if the SPX stays even thru Sept?

Have looked into it. Sept 1700 Puts are at 226 = 1474 and Sept SPX at 1473.70 so the DITM Put is trading at parity. And SPY is at 147.22. So Roughly its all at parity for Sep.

For March its 1495.90 for futures (my quote) and 208 for Mar 1700 Put, or 1700-208 = 1492, so indicates a small preminum and IB says its 14% IVol.

So the backwardation is in the Futures, with Options pegged to them ... but not for less than parity.

Thus it would seem IMHO that if the SPX stayed right at 1472.20 the 1700 Sep would be 226 +1.80 =$227.80 so a $180 loss in this case, which just may be a quote issue.

The March would reasonably lose 1/6th of their backwardization which is 23.20 now which would be 3.86 or $386 gain. So best I can figure the DITM 1700 Sep-Mar Put Calendar would gain 386-180 =$206.

Be most interested in comments on this.

TIA
More...
re:"The March would reasonably lose 1/6th of their backwardization which is 23.20 now which would be 3.86 or $386 gain. So best I can figure the DITM 1700 Sep-Mar Put Calendar would gain 386-180 =$206."

I think that you are assuming that the amount below par for the March contract is totally the result of BKW, it is not. It is the net of all factors of the standard options pricing formula including dividends. So you cannot simply divide 23.20 by 6 (actually closer to 7 months till March). You need to use an options calculator to estimate the change of March contracts at Sept expiration. My feeling is that your calendar spread is a loser if the SPX is unchanged.

BTW, I might have misunderstood your question because you implied that SPY was somehow involved, but I don't see how.

Don
 
Hi Don,

SPY was not part of the trade.

It was a DITM comparison issue with SPY, as no backwardation but early exercise (and thus comms loss) to SPX which does not have early exercize danger but does have backwardation.

I follow your concept on non-linear loss of backwardation, but if it was linear it would seem a winner (with SPX unchanged Sep Exp).

There is surprisely little info on this subject. Our posts come up first in Google search, and although DITM P SPX backwardation is mentioned by others, it is not in regard to whether there is a profit opp in it, or how it will behave with nearby Exp.

Even Natenberg does not have much to say about it.

If the trade can be put on for a credit and makes a tiny profit, that is pretty good as risk is tiny. I have it on RUT and SPX but am not sure what will happen.

Thanks for your comments.
 
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