Calendar spreads

[Maverick74]

Quote from Don Bright:

Calendar spreads are fine as long as you are collecting the $$ (thetas) on the near term time decay, while holding onto the delta neutral position via adjusting the far out position.

"Back in the Day" on the trading floor, I have to say that I enjoyed being long the March's, short the Decembers (of the same strike of course), and then roll them over as values warranted. This was (yes, Was) a good bread and butter position to keep on your sheets....but you still had to trade in and out of those positions on almost a daily (definitely weekly) basis to make the real money.

Love selling those calls on Thursday take a long weekend.

Can't find much benefit in the calendar spreads with low interest rates and such low, low, volatility.

All the best... (as always, I did not vote)

Don

Don, I have to disagree with you. First of all, when you have a long calendar on, you are short gamma and I would say it would be extremely risky to trade around the back month position ignoring the front month. Let me back that up with facts. Say you put on a long calendar with short nov 50's and long june 50's ok. Well as stock XYZ drops, because of your negative gamma, you will be getting very very long very fast. Now you are going to try to trade around the back month which means you are going to being buying deltas because the back month will be getting short as XYZ drops. So you will be in essence creating a massive long position. If that stock drops out of bed you are dead. Same thing on the rallies. You can't just ignore your negative gamma on the front month which as you near expiration will be getting increasingly large. Maybe I misread your post, but what you said is not only suicide but shows a complete disregard for the risk of your position.

I like the short calendars because I can scalp the gamma in the front month and still earn money by being short really expensive premium on the back month assuming I sold very overpriced premium to begin with.

If I wanted to I could put on a ratio spread on thursday on the front month position to carry positive theta over the weekend and take it off on Monday.

But back to your example, the idea of a long calendar is to not make any adjustments at all since every adjustment you make will realize a loss. Maybe you want to clarify your statement since I made some assumptions as to how you are trading the back month but you simply cannot just trade the back month and ignore your negative gamma in the front month. I have never heard a professional options trader ever make that statement. In fact if I told my clearing firm that they would close my account tomorrow. A disaster waiting to happen for sure.

 

[GATrader]

Maverick nice post about calendars. In this day and age, can u still put flies on for credit? how by being a mkt maker and slowly reducing your cost basis as you trade around a core fly position?
Thanks

 

[ChrisM]

Quote from Maverick74:



Chris, just curious, who is we?

Also, don't get me wrong, I am not saying butterflies are at all risky, in fact quite the opposite, they are very safe trades, however when you take part of it off, you are changing the structure of the position. Never the less, I think they are still great to trade, but if you really like them a lot, I would recommend going down to the floor, where you can actually put them on for a credit and enjoy a nice risk free trade.

Maverick,

I say "we" as I run small company doing market researches, recently also some FX brokerage in Europe.
About btflies: I just gave an example, but in reality I convert them into different strategies, however the mentioned example shows the idea of whole strategy.
Also, I do exactly as you said, stacking them on the top of each other. And by doing this and adjusting them I enlarge consequently trading range and increasing reward/risk ratio. Btflies has not that much to do with this. This is just good way to open whole position.
In reality I rather use condors, but I adjust them in similar way, thus buying back shorts do not break whole structure but actually increase your probability of profit, while at many times your profits can cover the cost of your OTM options.

 

[Maverick74]

Quote from GATrader:

Maverick nice post about calendars. In this day and age, can u still put flies on for credit? how by being a mkt maker and slowly reducing your cost basis as you trade around a core fly position?
Thanks

Off the floor there is no way you can put them on for a credit unless you are legging into them very aggressively. In that case, if your feel is that great for the stock, just trade the underlying outright then.

A market maker is earning 4 spreads on the butterfly right. Take the 60/65/70 long butterfly. The market maker will earn the spread on one 60 call, two 65 calls and one 70 call. Now I am not saying its easy for him to do this or all market makers would be billionaires. Also he has to trade around the paper coming into the pit. But as he trades up and down the strikes, if he leans with the market, it will not be hard for him to get the spread on for even or a small credit. We are taking like .05 to .10 here at the most. Of course its a risk free trade for him because the spread could expand to 5 points. But just for arguments sake, lets say its a fairly illiquid option, and he can earn .15 on the spread. So that's .15 per option coming out to .60 total. So if you could put that fly on for .50 to .55 debit, he could put it on for a .05 to .10 credit. The hard part for him is he probably is putting on several butterflies all day. Buying and selling several strikes and several months. At the end of the day, his position does not resemble a textbook butterfly but rather a very ugly wounded butterfly. LOL. But if he graphs his risk, it will show the same structure as a butterfly just not as pretty. His max profit will be near the center points where he sold options and his loss will come near the strikes he bought.

 

[GATrader]

I see. I used to be a sheet monkey wherein I entertain all paper coming in regardless of position if puts me in at end of day. If I were to do it again ( thinking of cotton pit in NY nice hours 10-2). I would definitely be more discerning of my markets so if I want to put on A B C fly, I would just bid on the a paper, offer on the b strike and bid on the c paper all day. At end of day, I would have put on fly at good prices due to floor edge. Am I getting insight correct. Now if only I can find a prop firm that spots traders on option floors. I am thinking of talking to SMW trading- used to be Singer Wenger I believe. Any other suggestions?

Thanks

 

[Maverick74]

Quote from GATrader:

I see. I used to be a sheet monkey wherein I entertain all paper coming in regardless of position if puts me in at end of day. If I were to do it again ( thinking of cotton pit in NY nice hours 10-2). I would definitely be more discerning of my markets so if I want to put on A B C fly, I would just bid on the a paper, offer on the b strike and bid on the c paper all day. At end of day, I would have put on fly at good prices due to floor edge. Am I getting insight correct. Now if only I can find a prop firm that spots traders on option floors. I am thinking of talking to SMW trading- used to be Singer Wenger I believe. Any other suggestions?

Thanks

I swear I don't work for them but Greentree does this I think. LOL. I know I have made several references to them on previous posts but I think they do back guys on the floor. I think I read it somewhere on their website but I could be wrong. Your insights are correct. If you think about what butterflies are they are in essence a ratio spread with an added call bought for protection. So market makers can put on ratio spreads quite easily especially for ATM strikes. The hard part for them is getting that paper on the outside call they have to buy. I mean how many people are selling 70 calls when the underlying is at 60 to 62 lets say with a few weeks to expiration.

 

[ChrisM]

Maverick,

one more question - how do you choose the difference between expiration months doing calendars ? Two at least or something more advanced ?

Thx.

 

[Don Bright]

Quote from Maverick74:



Don, I have to disagree with you. First of all, when you have a long calendar on, you are short gamma and I would say it would be extremely risky to trade around the back month position ignoring the front month. Let me back that up with facts. Say you put on a long calendar with short nov 50's and long june 50's ok. Well as stock XYZ drops, because of your negative gamma, you will be getting very very long very fast. Now you are going to try to trade around the back month which means you are going to being buying deltas because the back month will be getting short as XYZ drops. So you will be in essence creating a massive long position. If that stock drops out of bed you are dead. Same thing on the rallies. You can't just ignore your negative gamma on the front month which as you near expiration will be getting increasingly large. Maybe I misread your post, but what you said is not only suicide but shows a complete disregard for the risk of your position.

I like the short calendars because I can scalp the gamma in the front month and still earn money by being short really expensive premium on the back month assuming I sold very overpriced premium to begin with.

If I wanted to I could put on a ratio spread on thursday on the front month position to carry positive theta over the weekend and take it off on Monday.

But back to your example, the idea of a long calendar is to not make any adjustments at all since every adjustment you make will realize a loss. Maybe you want to clarify your statement since I made some assumptions as to how you are trading the back month but you simply cannot just trade the back month and ignore your negative gamma in the front month. I have never heard a professional options trader ever make that statement. In fact if I told my clearing firm that they would close my account tomorrow. A disaster waiting to happen for sure.

By constantly adjusting the ratio of the spread to offset delta change, you get more $$ coming in quickly on long calendar spreads...and you can collect $$ for 2 + expirations. This is what is done on the trading floor, where you can 'rotate' your inventory weekly.

When you have the overall delta in a neutral position, collect time decay, and adjust your gammas by trading the position....still seems like the right thing to do.

Don

 

[Maverick74]

Quote from Don Bright:



By constantly adjusting the ratio of the spread to offset delta change, you get more $$ coming in quickly on long calendar spreads...and you can collect $$ for 2 + expirations. This is what is done on the trading floor, where you can 'rotate' your inventory weekly.

When you have the overall delta in a neutral position, collect time decay, and adjust your gammas by trading the position....still seems like the right thing to do.

Don

Don,

I'm still not with you man. You can adjust ratios all day long, the fact of the matter is you have some serious negative gamma on that front month. Any adjustments you make on the back month will only increase your risk, not decrease it. By putting on ratios on the back month options in which you are long, you would have to be selling more premium right? Well, there's more negative gamma for you, albeit not a lot more, but more none the less. Now what if the position goes against the direction of your gamma. Well, then your screwed.

Maybe you want to provide a specific example but the way I see it, your neg gamma on the front month carries enormous risk, now you want to add more negative gamma on the back month to create a ratio against your long options there. This is the equivalent to lighting a stick of dynamite in your hands and seeing how long you can hold it before you lose your hand.

The only way to try to reduce the risk of this position is to be a wingspread on the front month to hedge your short gamma. Otherwise there is no way anybody on the floor is going to live a long life with that strategy.

Is this why you started your own prop shop? LOL

 

[Don Bright]

If I end up short an excess of "out of the money" near term calls, then of course there is high gamma and the accompanying risk....I realize that....but if the stock either moves through the strike, or stays away from the strike, the deltas catch up or go away...that is my point to all of this.

It can be a little unsettling when the stock is right at the strike....but in this day and age of super low volatiltiy, what else you gonna do?

But, like I said, more money is being made by trading 1000 contracts per day (leaving a 100 x XXX calendar spread on, when FV dictated), than the actual spread itself. I remember rolling over these spreads for years, they worked fine....I just cannot stand being long the near terms.....I can't sleep on the weekend because of hearing all that money rolling away....LOL.....

Don (Options are easier than Prop Shop)...