Is there a credit spread equivalent or synthetic of a calendar spread?
- Thread starter Pinozi
- Start date
How does that create a calendar spread?
Its P&L is more like a synthetic short stock (not equivalent but similar)
Quote from spindr0:
OK, lodging stock is what we call margin. gotcha.
MushinSeeker gave you the answer but perhaps it wasn't clear. If you want to do a synthetic calendar for a credit, you're going to have to short stock.
From a conversion formula, ignoring dividends and carry cost:
S + P = C
or
-S -P = -C
So shorting stock and selling a put is the same as a short call.
For example, you want to do a Nov/Dec 50c calendar. That's a debit transaction since the Dec call costs more than Nov. Since yer broke, you can't do thast. So you would short the stock, sell the Nov 50p and buy the Dec 50c.
Now it's just a question of if you have a good lodge to stay in
Thanks for the expanded explanation, shorting stock in my account isn't practical so I'll just have to go busking on the street to build up some free cash reserves
As I understand it, he has stocks in his account and wants to use that for margining (aka lodging) a calendar spread on another stock. So you need to take the long stock out of your equation.
If the stock in the account was being used with its own options, what you have suggested would be a diagonal since the strikes are different.
I understand, although you should consider a less complicated alternative to express your market opinion. If you can trade an iron fly given your brokerage restrictions, then I think you don't need to feel disadvantaged because you can't buy a calendar straight out.
Consider that the fly positioned at the relevant strike of the calendar is nearly the same trade as the calendar. Maybe even a better trade. You can express a neutral bias, you can position it OTM for a delta move, you're benefiting from time passage, and the risk is limited. The big advantage is that you don't have to worry about the vol differential during the trade. And don't get drawn into arguments about the differences in vega, as if that difference is material. Sure, that feature is different between the two trades, but excepting some unusual circumstances, it's hard to get that advantage to show up at the party. Of course your experience, the underlying, etc, will play into this, but for the most part, trying to anticipate vol changes in different expiration series to optimize your p/l is a challenge. If you're trading a front month calendar, a position that resembles a fly in the front month will almost always get you what you want with less hassle. The fly can be transaction-intensive, but depending on your choice of a back month for the calendar, even this apparent disadvantage of the fly might not really be so when you try and put the trade on.