Is that magic spread possible?

Gimpyron

Gimpyron

Hello dear people

Yesterday i found a stock with super high IV (265 for the strike i sold)
and IV of 100~ for the stock i bought. (calendar spread- 3 month gap)

I sold 90 calls and bought 90 calls for total of 0.2 debit.

My question for you the experienced is what possibly go wrong, the case that will make me lose money from that spread. i'v noticed for a possible lose if the strike goes too far for any direction at expiry, but except that, will decay in IV make me lose? (both option will lose IV)

ps: i'm trying really hard to find the magic stock with 0 cost spread, seems pretty impossible. opinions are welcome

have a wonderful day
 
The IV would have been high in anticipation of the earnings announcement on Monday 12/29, but yesterday 12/30 IV would already have collapsed. You must have been looking at end-of-day data.
 
Steve is right. It is largely earnings related. Also given the nature of the spot price and the available strikes you have significant skew effects making the vols seem steeper.

Earnings happened and now the vol is at 100 or so.

You will never find a calendar spread at zero. That would represent an arbitrage opportunity.
 
stevegee58 said:
The IV would have been high in anticipation of the earnings announcement on Monday 12/29, but yesterday 12/30 IV would already have collapsed. You must have been looking at end-of-day data.
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Ye the entire point is taking advantage of high IV to write this spread with minimum cost.
The thing that i miss, in what cases i will start losing money
 
newwurldmn said:
You will never find a calendar spread at zero. That would represent an arbitrage opportunity.
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Not true, several reasons for calendars to trade at zero. I was trading CNSB 85 call line for a credit yesterday and it was also offered in the COB for a small credit as well for some time before it traded. This is a takeover stock, with an all cash offer so very little risk buying a time spread for 0, but depending on how a takeover is structured there could be a substantial risk being long a time spread it you don't exercise your calls at the right time.

There also may be some risk in buying a call time spread in a hard to borrow stock. If you are assigned on your short calls, your clearing firm might auto liquidate your position for you.
 
FSU said:
Not true, several reasons for calendars to trade at zero. I was trading CNSB 85 call line for a credit yesterday and it was also offered in the COB for a small credit as well for some time before it traded. This is a takeover stock, with an all cash offer so very little risk buying a time spread for 0, but depending on how a takeover is structured there could be a substantial risk being long a time spread it you don't exercise your calls at the right time.

There also may be some risk in buying a call time spread in a hard to borrow stock. If you are assigned on your short calls, your clearing firm might auto liquidate your position for you.
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No problem, ill be happy if they liquidate my position. my plan is to sell the long spread as soon as the short realized. i'm using optionsxpress trade calculator, according to this tool i have almost 0% to lose (this is when i get suspicious.)
 
Gimpyron said:
No problem, ill be happy if they liquidate my position. my plan is to sell the long spread as soon as the short realized. i'm using optionsxpress trade calculator, according to this tool i have almost 0% to lose (this is when i get suspicious.)
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You may not be happy how they liquidate. Say you are assigned on 20 short calls from your time spread on a $100 stock. That is $200,000 worth of short stock. You come in to the day with the short stock and long your other calls. Your firm may simply auto liquidate your account, depending on how much money you have in it, by buying in your short stock and selling out your longs at the market.

Yes you could simply exercise your long calls and essentially sell the spread out for 0, but you may not have that opportunity if your broker auto liquidates on the opening.
 
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