Deep OTM Double Calender Spread

A

Amahrix

Peace,

Need some other minds to explain to me their opinion on such trades. How stupid is it? Risk/reward seems decent? Am I misinterpreting?

Here is the scenario:

Deep OTM Double Calender Spread

Stock @ $50 and earnings due Thursday. Trade is placed before earnings on Thursday.

Sell 45 Put frontmonth
Buy 45 Put backmonth

Sell 55 Call frontmonth
Buy 55 Call backmonth

Ideally, The frontmonth options are to expire the following Friday after Thursday’s earnings.

The backmonth can be the following week or month.

Purpose: Anticipate stock to rise or drop but not more than the short strike and thus expiring worthless and keeping all premium while holding long option in anticipation of ‘further’ drop into following week/month.

Peace,
Amahrix
 
You are going to see a vol crush on that back week or month also. So let’s say you buy it for $1.50 and the stock doesn’t move the shorts will expire worthless but your longs still could be worth less than the debit you paid for the spread.
 
Amahrix said:
How stupid is it?
More...
No question is stupid if you are putting in the effort to solve it.

Without going into how the term structure moves in sqrt(time), shrink the volatility to post earnings predicted vol. You will see the calendars get very narrow.
 
Peace,

Thank you for both responses.

Indeed I recognize that I will initially get crushed but still anticipate to survive via one of the shorts expiring worthless.

Subsequently, I anticipate that there will be a further drop/rise that continues the following week/month and causes the long put or call to begin going ITM and start producing profits.

As I’m typing this, I’m thinking to myself... what if the price of the long put/call would be the same if I simply enter the position after volatility gets crushed once the event passes.

I originally thought to do this to get into the long calls and puts at a discount (financed by the shorts) in anticipation that it’ll go ITM regardless of direction hence the double spread.

But maybe those longs will be priced the same had I just waited until vol gets crushed versus attempting to buy at a discount financed by the shorts.

Maybe that discounted price will be the “MSRP” once vol gets crushed and no need to do double calendar but simply go long put/call after.

Unless it isn’t priced the same and the discount does have an effect (all under the assumption it goes ITM)

Any comments on this?

Peace,
Amahrix
 
Why not post a trade that you think is reasonable. With real numbers. We can break it down and see whats missing or better yet where we can make money.
 
I think it is feasible when there is a nice skew. Post earnings the front months should collapse while backmonths should see smaller IV if you pick the right skew. Problem is similar to straddles where you have two sets of options so the debit is higher so the risk is higher and if vols crush the whole position could collapse if you cannot wait for expiration for stock to stay in profit zone.

Below is a double calendar for M with earnings coming up. POsting here so I can post the follow up and you can see what happens:

upload_2018-8-13_20-56-0.png


OTM put and call calendar based on earnings coming up with wide profit zone. As long as you hold until expiration but you have to separately model vols in back month to see where position would be but as you can see the positions is $250 maximum risk with huge potential...
 
Peace,

It’s ironic you used M as an example as this was the stock I was planning to execute the trade on earlier today.

It’s also ironic you mentioned $250 because my max risk was going to be $250; $250 on both sides though for total of $500.00.

Peace,
Amahrix
 
When I am looking at the option chain in TOS I will look to see where the vol starts to stabilize and use that as "support". M looks likes around it could crush to about 40% to 45%. If the stock doesn't move I think you could take about 65 cents out of a 1 lot.
 
Peace,

El OchoCinco said:
Spreads are cheap on M due to the skew but I only have one sided calendars going into the earnings.
More...

What do you mean by 'skew' exactly? Is it that the market thinks it's most likely headed in one direction versus the other and not an even 50/50?

Peace,
Amahrix
 
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