In the money Calendar Spread

[spindr0]

Quote from EliotHosewater:

"Why not do the put calendar above and the call calendar below the current price? A couple of quick checks on TOS shows that the cost about the same and the risk graphs appear to be identical, at least for the first expiration. Then if the stock moves up your call are still ITM and if it moves down your puts are ITM. You might even be able to roll into a diagonal."

Yes, in a fair priced market, the risk graphs will be the same.

There are two problems with ITM "guts" strangles (short ITM put and short ITM call):

1) You are likely to incur more commissions since at least one and possibly two of the ITM's will have to be closed.

With the OTM calendar pair, if the underlying stays within the range, both short legs will expire if you're holding until expiration.

2) If you're trading news events such as earnings that will have overnight IV contraction, the short ITM's may go to parity and then you face early exercise. Again, even more commissions as well as capital tied up due to an opening and a closing stock transactions.

The KISS technique applies here :->)

 

[Eliot Hosewater]

That just proves why one should never try to devise option strategies with a hangover.

 

[MajorUrsa]

Quote from spindr0:
By bracketing the underlying, you have a range b/t the strikes where the underlying will be profitable and possibly more so due to contraction in IV.

A long calendar (short near month, debit) has long vega, so how will it profit from an IV collapse?

Ursa..

 

[momoneythansens]

Quote from MajorUrsa:

A long calendar (short near month, debit) has long vega, so how will it profit from an IV collapse?

Ursa..

The proviso was to ratio more short legs than long legs. The assumption being that IV in reporting month implodes matched by a much smaller reduction in back month IV.

If the underlying gaps from the event (earnings) this could be problematic for the proposed position

 

[billp]

Sorry. Newb question here. What is legs? Thanks

Quote from momoneythansens:

The proviso was to ratio more short legs than long legs. The assumption being that IV in reporting month implodes matched by a much smaller reduction in back month IV.

If the underlying gaps from the event (earnings) this could be problematic for the proposed position

 

[momoneythansens]

Quote from billp:

Sorry. Newb question here. What is legs? Thanks

If you're trading spreads, there will be two or more legs that make up the spread.

A vertical has two legs (a short leg and a long leg)
A calendar has two legs (a short leg and a long leg)
A butterfly has three legs etc.

In the foregoing example, the suggestion was to have more options in the short leg than in the long leg.

 

[billp]

Thanks. Got it

Quote from momoneythansens:

If you're trading spreads, there will be two or more legs that make up the spread.

A vertical has two legs (a short leg and a long leg)
A calendar has two legs (a short leg and a long leg)
A butterfly has three legs etc.

In the foregoing example, the suggestion was to have more options in the short leg than in the long leg.

 

[tower]

This is a theta trade that can work well in flat market.

Your exposure isn't getting the V (Oct) called away but rather if the stock (or futures) move far from your strike. Your max profit for the spread will be if V settles at your strike. Your window of profit (the distance from your strike - either way) will narrow over time.

You probably should consider calculating these ranges prior to putting on the trade.