Low Risk/High Reward (60%+ per Year) Calendar Spread

Whats your strategy for rolling the short position(s)? Are you going to avoid taking a position in earnings months? Risk management?

In reference to your bid/ask question, i have always found that I get a nickel or dime better in pricing when I leg into a trade, rather than entering spread orders. I think you mentioned something about legging in, so that is the way to go.

Oh BTW - which stocks are trading at a low IV in the back month that are going to give you enough premium in the front months to meet your profit goal? Most IVs are pretty extended here with VIX approaching 30.

Best..
 
Blackjack & dmo,

Thanks for your input... regarding blackjack's concern about an increase in IV, I think dmo addressed it perfectly. This strategy absolutely wants/needs the IV to rise. That's why a key condition to the trade is to enter the spread with a low IV in effect.

dmo,

I appreciate your "out of the box" suggestions on using ratios with the calendar. I'm just afraid that the additional risk may not warrant the potential additional reward. However, I'll certantly give it serious consideration.

Walt
 
Quote from jones247:



dmo,

I appreciate your "out of the box" suggestions on using ratios with the calendar. I'm just afraid that the additional risk may not warrant the potential additional reward. However, I'll certantly give it serious consideration.

Walt
More...

Doing ratios doesn't necessarily increase the risk, it just CHANGES the risk. If you were able to buy back-month volatility at rock-bottom IV, then I would argue that buying extra back-month volatility vastly improves your risk profile. It only increases vega risk, which is your risk of least concern if you are confident in the "cheapness" of the back month volatility you bought. In fact, in this scenario you WANT to emphasize the long-vega aspect, as that's the most high-probability aspect of the play.
 
Hi Div Arb,

I intend to dynamically hedge and close the spread once my profit thresholds are met. I'm considering a leg-in/average-in method for getting better spreads, but I've yet to test it. I use various IV/HV analysis tools (OptionsXpress & IB) to assess appropriately low IV opportunities. A big edge for obtaining low IV in my opinion is waiting until a major volatility crush after earnings or mergers or economic news. Currently, I'm testing OTM reverse calendar swap spread within Aug/Sep time frame, as well as the ATM calendar swap spreads mentioned in this thread. Currently, I'm testing this strategy with AA, BUD, GE & BIUDU...

Walt

Quote from Div_Arb:

Whats your strategy for rolling the short position(s)? Are you going to avoid taking a position in earnings months? Risk management?

In reference to your bid/ask question, i have always found that I get a nickel or dime better in pricing when I leg into a trade, rather than entering spread orders. I think you mentioned something about legging in, so that is the way to go.

Oh BTW - which stocks are trading at a low IV in the back month that are going to give you enough premium in the front months to meet your profit goal? Most IVs are pretty extended here with VIX approaching 30.

Best..
More...
 
Your point on vega impact is well taken; however, I'm afraid of losing my delta neutrality, although I can hedge it against buying/selling the underlying. Since I'm doing a call & a put calendar spread (strangle swap), it could become very complicated/expensive to continually adjusting my underlyings... but vega point on low IV taken nonetheless...

Walt

Quote from dmo:

Doing ratios doesn't necessarily increase the risk, it just CHANGES the risk. If you were able to buy back-month volatility at rock-bottom IV, then I would argue that buying extra back-month volatility vastly improves your risk profile. It only increases vega risk, which is your risk of least concern if you are confident in the "cheapness" of the back month volatility you bought. In fact, in this scenario you WANT to emphasize the long-vega aspect, as that's the most high-probability aspect of the play.
More...
 
Quote from jones247:

Your point on vega impact is well taken; however, I'm afraid of losing my delta neutrality, although I can hedge it against buying/selling the underlying. Since I'm doing a call & a put calendar spread (strangle swap), it could become very complicated/expensive to continually adjusting my underlyings... but vega point on low IV taken nonetheless...

Walt
More...

Actually, by buying more back month options and selling fewer front month options, you can get gamma neutral - meaning you would have to adjust your deltas less, not more.

Don't mean to keep dogging you here Walt - it's your thread and I sense you want to do it the way you conceived it. That's fine and as it should be. Perhaps you're put off by the additional complexity of the ratio and using the underlying. If so, don't be. It's tough to make a buck in this game and the more comfortable you become with deviating from neatly-shaped strategies, the better your odds of success will be.

Just my 2 cents.
 
I can't argue with the fact that a ratio calendar spread would favorably impact gamma... I'll certainly try to get a better grasp on the risk/reward probability impact of your suggestion.

I guess that I'm banking on the favorability of the vega & theta impact. I'm not terribly concerned about price action/trend, as I am simutaneously in a call and put calendar spread. I can't derive a scenario that would be disasterous if vega and theta are working in my favor. At worst, my loss is small. By legging-in and averaging-in dynamically, it will only increase the odds of success.

Any thoughts...

Walt


Quote from dmo:

Actually, by buying more back month options and selling fewer front month options, you can get gamma neutral - meaning you would have to adjust your deltas less, not more.

Don't mean to keep dogging you here Walt - it's your thread and I sense you want to do it the way you conceived it. That's fine and as it should be. Perhaps you're put off by the additional complexity of the ratio and using the underlying. If so, don't be. It's tough to make a buck in this game and the more comfortable you become with deviating from neatly-shaped strategies, the better your odds of success will be.

Just my 2 cents.
More...
 
Quote from jones247:

I can't argue with the fact that a ratio calendar spread would favorably impact gamma... I'll certainly try to get a better grasp on the risk/reward probability impact of your suggestion.

I guess that I'm banking on the favorability of the vega & theta impact. I'm not terribly concerned about price action/trend, as I am simutaneously in a call and put calendar spread. I can't derive a scenario that would be disasterous if vega and theta are working in my favor. At worst, my loss is small. By legging-in and averaging-in dynamically, it will only increase the odds of success.

Any thoughts...

Walt
More...

To me it's a matter of leveraging your situation to the hilt - custom-tailoring a position to best fit the options contract you're looking at. I'm not suggesting that a ratio spread is always the answer. But if you in fact find back month volatility that's ridiculously low by the historical standards of that stock's options (not likely at the moment, as someone pointed out), I would hate to forego taking maximum advantage of the potential upside. I might sell front-month volatility enough to offset the theta risk, so I could wait it out until "something happened." But I wouldn't want to sell more volatility than that. This is a long-volatility play after all - why would I step on my own toes?
 
I believe the volatility crush after earnings sometimes provide an ideal circumstance for entering the calendar spread. This would increase the vega probability in your favor. Of course, one may average-in on calendar spreads if the IV continues to go lower. Dan Sheridan, one of the most renown experts on options is a BIG proponent of "guerrilla" calendar spreads, where the expiration on the front month is about 30 days away. With such a strategy, the IV is not as crucial. It's the Theta and minimal change in the price of the underlyer that's most important. He claims that a trader can generate as much as 100% annualized return on spreads. I believe that's 100% ROI, not 100% ROA!

Walt
 
Walt,
are you still looking for a typical sideways trading issue with relatively low volatility?

Any other parameters you are finding helpful.

best regards,
SP
 
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