call calendar or put calendar?
- Thread starter yip1997
- Start date
I asked a similar question here:
http://www.elitetrader.com/vb/showthread.php?s=&threadid=82668
http://www.elitetrader.com/vb/showthread.php?s=&threadid=82668
(1) If the calls have better liquidity, you can initiate the call spread more advantageously. (2) In order to get a volatility spike, the market would have to crash. This should benefit the long-March over the short-Feb. (3) A volatility spike should also tend to affect out-of-the-money strikes more than in-the-money strikes. Believing that, the call-spread appears to be a little better. It would be out-of-the money AND the March option should have more vega response than the Feb.
I don't even remember what I had for breakfast today.
But based on the date of the post (12/14), CEPH was ~ 71. It was a bullish calendar. Although I still see what you're seeing pretty regularly. For a bullish calendar, I end up buying the calls because I don't want to be assigned. Sorry I can't offer much more.
But based on the date of the post (12/14), CEPH was ~ 71. It was a bullish calendar. Although I still see what you're seeing pretty regularly. For a bullish calendar, I end up buying the calls because I don't want to be assigned. Sorry I can't offer much more.
It's not the most scientific answer but if you have a modeling program, go long the put calendar and short the call calendar (or vice versa). If one position has an advantage, it will show a positive gain to one side. If no advantage, the P&L curve will be close to flat.
W/O a pricing discrepancy, I wouldn't expect any advantage. I'd lean toward the OTM and the chance that it expires worthless, saving a closing commission. I'd focus more on getting the direction right
FWIW, from the attachment posted, CEPH was 71.39 x 71.40
W/O a pricing discrepancy, I wouldn't expect any advantage. I'd lean toward the OTM and the chance that it expires worthless, saving a closing commission. I'd focus more on getting the direction right
FWIW, from the attachment posted, CEPH was 71.39 x 71.40
The relationship is called the Jelly Roll, i.e. long synthetic stock in the front month and a short synthetic in the back month (or vice versa). At expiry of the front month you are left with a short synthetic stock, so in order to hedge it to expiry of the back month you need to buy the actual stock, which will attract a cost of carry. At the moment, those calendars are at 8.6 call cal and 6.45 put cal. The cost of carry on the stock from Feb exp to Mar is 2.15, which is exactly the difference between the two.
Cost of carry = 790*(0.0525-0.0169)*28/365=2.15.
0.0525 is the risk free rate
0.0169 is the div yield
28 is the number of days between Feb and Mar expiry.
Good answer, particuarly since I was even able to understand it
Does that mean that the imbedded 2.15 cost of carry will be constant through near term expiration? IOW, there's no advantage to taking one side or the other for 3 weeks since that 2.15 CoC will not start ticking off until the Feb hedge expires?
Quote from spindr0:
Good answer, particuarly since I was even able to understand it
Does that mean that the imbedded 2.15 cost of carry will be constant through near term expiration? IOW, there's no advantage to taking one side or the other for 3 weeks since that 2.15 CoC will not start ticking off until the Feb hedge expires?
Basically, yes.