Newbie with fool proof strategy... or pipe dream? Why wouldn't this work?

B

B Johnson

Okay so I'm talking about calendar spreads...


Example:
February crude oil short ATM call
March crude oil long ATM call
net debit

after I wait a month or so, then I simply buy back the spread for a gain from the faster time value dissipation from the Jan call... if long call is ATM then if underlying price rises, falls, or stays the same then wouldn't implied volatility rise or stay the same assuming a u-shaped graph (strike on x-axis, implied vol on y-axis) and no big news...

Is it really that common for implied volatility to drop and eat away long call value MORE OFTEN than the gain from the differences in theta? When this does happen, one could set up stops that take into account time value differences at expiration and maximum implied volatility loss tolerance to minimize losses

And assume that I will sell the long call at the same time the short call option is bought back, expires, or is exercised.

What am I missing here? Am I missing nothing and simply relying on my assumption that the implied volatility won't take a nose dive? Is this a reasonable assumption for an ATM spread? (I understand that if it was out of the money and underlying price approached the strike price then implied vol would probably fall)
 
Model it up in excel. And look at reasonable historic scenarios to determine what the likely behavior will be.

You will see where this strategy works and where it doesn't and after the excercise you will be a "little less newbie"
 
ATM calendar spreads only profit when the underlying stays range bound. If it moves outside the range you lose the net debit (what you paid for the spread).

You seem to be missing the point that movement of the underlying has a huge effect on the trade's outcome.
 
Correct me if I'm wrong, but the delta is higher for the call with the closer expiration so if the call became far enough ITM, losses would start to accumulate. But if the underlying price went the other way and the short call became further OTM, then that would be profitable. When you say "range bound", you are talking about an upper bound only (for calls)?

So the only way one could lose in this example would be if the price went high enough, fast enough AND/OR the imp vol dropped enough on the long call... sounds pretty solid. Anybody out there trade a lot of time spreads?
 
No, range bound means just what it looks like. An ATM call calendar spread profits within a range above and below the ATM strike price. Here's an example NOV/DEC 110 Call on QQQ. This is all Options 101 stuff.

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I'm talking about if I assume that I will sell the long call at the same time the short call expires or is exercised or is bought back. I need to run this through amibroker...
 
My silly comments: I do not trade futures, so pardon my ignorance:
I just looked at OIL ("/CL") in TOS, and observe no March options. <-- Head Scratch #1.
/CL options seem to currently be in backwardation, producing an additional headwind against the suggested "Calendar Trades". <-- Is this common for Oil? (Head Scratch #2)
upload_2015-11-15_14-12-59.png

The delta of the two contracts should be the same (or very close), per definition of ATM, so do not understand comment about near month Delta being higher than back month delta.
If you are willing and able to endure the PnL variation during the interval to near month Expiry, then your risk is "primarily" price action as stevegee58 states.
 
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