Most of the advanced option trading books/manuals that I've searched through have strategies using a diagonal spread where the front month is sold and the farther out month is bought. I'm looking for any author who has a strategy where the front month is bought and the back month is sold. On top of which, a ratio where more options are bought in the front month than are sold in the back month. An example of what I'm looking for would be Long 4 June 2009 calls and Short 1 December 2009 call. Does anyone know who teaches this or at least discusses it?
Option teachers
- Thread starter asdfghj7
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I can't speak for the universe of option books but in all I've read, reverse calendar spreads are rarely mentioned because on the surface, they make no sense due to the higher time decay in the near month versus the far month.
While I'm far from an expert, I've done a lot of them before major news events where IV has skyrocketed as well as earnings releases in the last week before expiration. Actually, it's been a combination of a ratioed reverese calendar on each side of price - puts and calls (double ratioed reverse calendar?). Have also diagonalized them. AFAIK, you have to do a lot of digging to find good probability candidates (skew differential and inflated IV).
I'm far from an expert (LOL) but I have discussed it occasionally here with some (picked it up a couple of years ago from from IV_Trader who posts here). Search fpr his posts as well as "reverse calendar". ET posts aren't the Holy Graille but it may give you some ideas. And if you ever find a text that goes into detail about them, plz post its title here.
Short Calendar
Dave at
http://www.deltaneutraltrading.com/blog/
Congratulations, you are thinking, asking and learning.
Carl
Dave at
http://www.deltaneutraltrading.com/blog/
Congratulations, you are thinking, asking and learning.
Carl
I have not written about this, but it is a position with high positive gamma.
It also has significant negative vega.
A huge upside move should give you a big winner. The sooner the move, the better.
A big downside move would be a likely winner (if you collected a credit to establish the trade), but because IV is likely to increase, the gain due to gamma may be partially (or completely) offset by the IV increase.
The big risk in this type of position is theta. As time passes, if nothing major happens to the price of your underlying, this position is going to cost you plenty. Thus, the idea is to have this position only when you anticipate a big move - and quickly.
Mark
Reverse calendars make perfect sense as a way to short vega while remaining fairly neutral gamma and theta. But your ratio would be the opposite of what the OP posted - you would sell more of the back month than you would buy the front month.
The practical problem with this is often that when volatility spikes higher, the front month often rises way more than the back months. So you're buying the thing that you're most bearish on (front month IV) and selling the thing that you're less bearish on (back month IV). Still, it can often work since you are short so much more back-month vegas than you are long front-month vegas.
The practical problem with this is often that when volatility spikes higher, the front month often rises way more than the back months. So you're buying the thing that you're most bearish on (front month IV) and selling the thing that you're less bearish on (back month IV). Still, it can often work since you are short so much more back-month vegas than you are long front-month vegas.
Yep, that's what I was doing for pre earnings IV inflated situations where there was a fair amount of skew as well (and the back month was higher than H-IV).
It would make no sense to me to buy more of the near month in the calendar ... but I suppose that there's always a possible situation where something makes sense to someone
Quote from spindr0:
It would make no sense to me to buy more of the near month in the calendar ... but I suppose that there's always a possible situation where something makes sense to someone
I agree. I'm trying in vain to think of a scenario where I'd like to bet on higher actual volatility, while at the same time protecting myself against a fall in implied volatility. That's what the OP would be doing by buying 4 front month options to every 1 back month option he sells.
If one ignores the disparate rates of time decay as well as the concept of IV change (a polite way to describe a neophyte), I would think that the 4:1 ratio might seem enticing because the far month provides a larger premium and would appear to offset a lot of the cost of the long leg. However, in the real world, it's not going to be a pretty risk graph with such a long time frame.
If you shorten the time frame to say 1:2 or 1:3 months (buying really cheap near month calls and getting enough premium from the short leg to cover the cost of the longs), it's a better scenario (tho still not great). Then, an IV change up or down doesn't hurt the near month much and you get some bang for the buck to the upside but not much loss to the downside because if driven toward parity, there's little to no loss.
You make my head hurt