VP...in revisiting your posts you said the vol crush after earnings negates a multi-month spread....I would say so what? won't vols return to normal in the ensuing months due to other factors? In other words after putting on the calendar...is IV that much of a factor?
Calendar Spreads
- Thread starter gatorplease
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couldn't help it went there....actually kinda cute
I knew that you would.Quote from DonnaV:
couldn't help it went there....actually kinda cute
Donna,
in general I like to use call calendars because they are generally more liquid than puts. Unless, the call cal. is slightly ITM, then I look to use the put cal which is slightly OTM. I feel this helps me lesson assignment risk.
in general I like to use call calendars because they are generally more liquid than puts. Unless, the call cal. is slightly ITM, then I look to use the put cal which is slightly OTM. I feel this helps me lesson assignment risk.
Donna,
There are 2 ways calendars lose $$$. First is large directional move in underlying. Second is implied volatility coming down. Since you are 'long premium' (pay more for far month option than you bring in for front month option), your longs get hurt more. That's why im leery about putting on a long calendar when iv is in the clouds, eeks:eek:
There are 2 ways calendars lose $$$. First is large directional move in underlying. Second is implied volatility coming down. Since you are 'long premium' (pay more for far month option than you bring in for front month option), your longs get hurt more. That's why im leery about putting on a long calendar when iv is in the clouds, eeks:eek:
your certainly right in the shorter term...I can see in both rmbs and wfmi if I closed today I'd lose money even tho they are strongly down....however if I can roll I'll then be very close to paying for the longs with lots of time to still make money. The problem is that direction needs to stay in my favor...whereas you are more non directional and still make money...hopefully I'll get there eventually
I would love to hear more on the 'carnival spread'.
I think I've done this before, but didn't have a name for it.
I think I've done this before, but didn't have a name for it.
Quote from volatilitypimp:
...If stock moves outside 1 sd within 2 weeks, i'll close at a loss, or turn the position into a 'carnival spread' (multi-strike big top tent lookin' thing).
I would be happy to go over this type of spread. It's basically a time spread with three, four or sometimes even five different strike's, usually consisting of both puts and calls, and some of the strike's can be ratioed as well(to help the p&l graph). What this does is give the underlying a larger range of motion for profitability as opposed to the single strike calendar. Although it's a bit more labor intensive than the single strike calendar, it has advantages.
1. The 'outside strikes' are typically OTM, and don't cost as much.
2. You have almost effectively taken away 1 of the disadvantages of the calendar(movement of the underlying) thus you only need to worry about your vega exposure(decreasing volatility). (yeah, i know, i know gap risk is still there, but for simplicities sake, u get the idea)
Let me give you an example. In late December, I thought a BMC software 22.5 call(jan/may) calendar looked juicy. After IV went up sharply, I figured directional risk could become an issue, so I bot the 25 call cal.(jan/may) and the 20 put(jan/may). I decided to buy 14 put calendars as opposed to my 10 contracts each for the calls(22.5, 25). This is a matter of personal preference & I think it helps the downside of the p&l graph. I am already at breakeven on this position and I still have 2 front month roll opportunities. The only thing I don't like here is that earnings are this week, and IV is currently at the high end of the range. But still, this position is already paid for so who's complaining? I expect to roll my short febs sometime late next week or early expiration week. That's basically it. The p&l graph at expiration looks like a big top tent for these strategies, so I guess you could call it a triple(quad) calendar or carnival spread or whatever floats your boat.
I have been focusing on these types of trades as well as double diagonals, and iron condors, because I am sick of having to choose direction in the market
grrr, i've lost a king's ransom in my directional heyday.
I guess I still use it occasionally, but non-directional income strategies are becoming more and more my bread & butter.
I will update when I roll my short strikes.
1. The 'outside strikes' are typically OTM, and don't cost as much.
2. You have almost effectively taken away 1 of the disadvantages of the calendar(movement of the underlying) thus you only need to worry about your vega exposure(decreasing volatility). (yeah, i know, i know gap risk is still there, but for simplicities sake, u get the idea)
Let me give you an example. In late December, I thought a BMC software 22.5 call(jan/may) calendar looked juicy. After IV went up sharply, I figured directional risk could become an issue, so I bot the 25 call cal.(jan/may) and the 20 put(jan/may). I decided to buy 14 put calendars as opposed to my 10 contracts each for the calls(22.5, 25). This is a matter of personal preference & I think it helps the downside of the p&l graph. I am already at breakeven on this position and I still have 2 front month roll opportunities. The only thing I don't like here is that earnings are this week, and IV is currently at the high end of the range. But still, this position is already paid for so who's complaining?
I expect to roll my short febs sometime late next week or early expiration week. That's basically it. The p&l graph at expiration looks like a big top tent for these strategies, so I guess you could call it a triple(quad) calendar or carnival spread or whatever floats your boat. I have been focusing on these types of trades as well as double diagonals, and iron condors, because I am sick of having to choose direction in the market grrr, i've lost a king's ransom in my directional heyday. I guess I still use it occasionally, but non-directional income strategies are becoming more and more my bread & butter.I will update when I roll my short strikes.
Thanks for the explanation (and example).
I put on a new calendar today. AMBAC Financial Group.( ABK) The implied volatility looks 'overvalued' compared to historical volty over a 52wk period, past IV action looks really stable and passes my under 30 IV guideline. By 'overvalued' I mean historical volty resides beneath implied volty, thus we are earning some nice coin on our sold legs. The ATM march/may IV skew is less than +1%, which tells me there are no news items pending(earnings,mergers,etc). I picked march/may because I will still have 1 roll opportunity. Long Aug seems a bit too far away and could have some delta issues down the road. So I decided to buy the ABK 75 strike put calendar(mar/may) The calls were slightly ITM so I decided on the puts. I will update on any adjusments/rolls.