Calendar spreads

[Hello_Dollars]

Riskreward,

Sounds like you're suggesting an out month iron butterfly or iron condor. If so, you're correct that your margin will be reduced as all the short options are covered. And yes, the position would typically be delta neutral when established and is vega negative. However, unless there's a noticable skew, such positions may not be the best way to capitalize on the expectation of an imminent volatility implosion since you will also be buying high priced options in establishing the position.

Personally, as someone who's traded these for a while, even with an expectation of declining volatility, I'd never use iron butterflies/condors with options having more than say 45 days of life given the gamma risk and the fact that theta doesn't really start generating profits for you until then. Just my 2 cents.

Regards,

HD

 

[riskreward]

Thanks for the reply. You say the position would be unprofitable unless there was a noticeable skew. I read my natenburg but I want to make sure my understanding is correct.

By skew, do you mean a case where implied volatility of both puts and calls are above statistical volatility or above what a pricing model considers as fair value?

I was hoping to put these positions on in a case like Maverick described where volatility has been pumped up before an earnings report (I think whole foods was a case like this) or an impending announcement. These sound like good positions to put on and diversify with.

 

[ChrisM]

Quote from Maverick74:



Chris,

A couple of things here. One, what did the stock do after they reported. Two, a one point loss is not that bad and the reward is not a qtr of a point. I have made over 4 to 6 pts in these trades and higher. I said most of the gains and losses would be small which is why I said you need to do a lot of them. Many of the gains will only be for 1/4 or 1/2 pt. And most of the losses will be for 1/4 to 1 point. But if you do enough of them the risk to reward ratio is very attractive. Also do you know how much the vol came in with mrvl? By the way, the prices you used were taken off the bids and offers which is fine but I always leg into these and get at least a nickel if not a dime off the bids and offers. So that already drops the loss to only .60 vs a dollar.

Mav,

would you find KKD as a good candidate for today`s session ?
If yes, let`s see what will happen.

 

[Hello_Dollars]

Riskreward,

I didn't say the positions would be unprofitable without a noticeable skew. Rather, I suggested that, unless the implied volatility of your short options is materially higher (i.e. 15%) than the IV of your long options, there are better ways than vertical credit spreads to capitalize on the expectation of an imminent volatility implosion. But even absent a skew or a volatility crush, you can still make money with credit spreads from theta, provided the underlying cooperates in a directional sense.

As far as what constitutes "high volatility", the key thing to look at is not whether IV is higher than statistical vol, but rather what the current IV levels are relative to where they've been on that particular security over some pre-defined historical period (i.e. 6 months, 3 years). If IV is in the top decile, say, of all readings on that security over the previous year, for example, then its safe to consider it "high". If, on the other hand, it's in the bottom 20%, but still above statistical vol, it might not be wise to establish a vega negative position.

Hope that helps.

HD

 

[riskreward]

Thanks for the response. I read Natenburg last night and things are clearer now. I was planning to use some hard and fast rule like IV had to be some percent above the average or be in some percentile before I put on these spreads.

Any idea of how much capital would be appropriate for these spreads? 25000 to start with?

 

[Doubter]

KKD short calender staddle was at 1.15 net credit 11/20 close.

Same straddle so far today has run 1.20 to 1.30 debit to repurchase. So far for a loss of .05 to .15.

I was, however, not impressed with the across month vola skew at the time of entry. The small loss and stability is encouraging to look further. If the vola skew had been better probably there could have been some profit.

 

[ChrisM]

Quote from Doubter:

KKD short calendar staddle was at 1.15 net credit 11/20 close.

Same straddle so far today has run 1.20 to 1.30 debit to repurchase. So far for a loss of .05 to .15.

I was, however, not impressed with the across month vola skew at the time of entry. The small loss and stability is encouraging to look further. If the vola skew had been better probably there could have been some profit.

Doubter,

so you would trade calendars only if vola skewness is significant ?
Also, would you trade in longer time perspective ? (Maverick says he opens them for a day).

 

[Doubter]

ChrisM,

The repurchase on KKD at 2 est is 1.15 to 1.20 so you could probably get out even now.

I believe Maverick is saying that you need a vola collapse for the trade to be profitable and this is probably the case with KKD, since it wasn't very high on entry.

I haven't traded these in this way but since Maverick has and only holds for one day I would probably start out that way.

At the close today the scene may change.

The thing I like about these is their stability and risk management. Cutting down the variables to only vola really could help.

 

[ChrisM]

Quote from Doubter:

ChrisM,

The repurchase on KKD at 2 est is 1.15 to 1.20 so you could probably get out even now.

I believe Maverick is saying that you need a vola collapse for the trade to be profitable and this is probably the case with KKD, since it wasn't very high on entry.

I haven't traded these in this way but since Maverick has and only holds for one day I would probably start out that way.

At the close today the scene may change.

The thing I like about these is their stability and risk management. Cutting down the variables to only vola really could help.

Doubter,

although working with a lot of news gets me back to the place where I was at the beginning, I understand that approach with calendars is completely different.
So, you have held them for longer ? How long and how was it ?

 

[Maverick74]

Quote from ChrisM:



Doubter,

although working with a lot of news gets me back to the place where I was at the beginning, I understand that approach with calendars is completely different.
So, you have held them for longer ? How long and how was it ?

Chris,

You can hold a short calendar as long as you want. Just keep in mind that you have short theta on that front month. So you can either scalp the gamma or take a delta position to pay for the time decay. It's just as viable. In fact it can be very profitable on the long side. For example, looking for stocks that have come in really hard and have had vol spikes. By putting on the short cal you can basically hold a long deltas position and profit from the decrease in vol on the way back up. Like I have said before, there are a million ways to do these things.