Quote from rallymode:
I see this thread is still going so let me throw in a comment. I havent seen much discussion on delta calendars and i think you guys are missing out. If you have average directional skills you are really wasting your time and efforts trading these ATM time spreads on sub 20 vol tickers. You wait 3 weeks and collect your theta and when you are ready to book gains, the spot gaps on you and forces you to roll and then the waiting game starts all over. That just about sums up 90% of your experiences, doesnt it?
Take the calendar and place it OTM into the direction of your signal. I personally prefer puts on rangebound high vol stocks. You play for deltas and vegas while having positive theta. Also, you can shift the balance of the bet according to your forecast by varying the duration. Longer for vega, shorter for delta.
A few caveats to keep in mind:
1. You want to make sure the vols are near the low if not at the low of the recent range while the tenor skew is flat or negative(lower vols in the back months).
2. You want to make sure the vol-smile in the back month is as flat as possible so that you dont overpay in skew. You dont want to gain a few hundred bps in vols and have them wiped out by the skew.
3. It's a vega bet so when trading equities consider the earnings releases and the implications of volatility cycles.
These are also excellent hedges if you tend to carry a lot of short gamma on your sheets. Just something to think about.
Great post , RM. OTM is the way to go , but why high vols stocks are better ? Vols nominal and debit paid are trade offs , no ? And you are missing one (but most important part) in earnings trades...Check out LOW's NOV/DEC otm calendar's prices for the last week , it should give you a hint