Reverse Calendars
- Thread starter IV_Trader
- Start date
IV,
I've been playing with diagonal backspreads and reverse calendars for IV moves.
On several RC's I've tested, I'v found that the tenor skew change compensates for the 'time vega' to borrow Mo's term. I end up +- break even on trades structured with the earnings dates in the front expiration.
I've been experimenting with standard and ratio calendars (long back,short front) in high vol situations. Very dangerous if you use a near term long options but here I'm using much longer-term long options (6 mo's) - something that isn't showing inflated vols. One indicator is using the lowest average vol month in the chain - often 4-6 months out. Higher debit, certainly, but attempts to sidestep the vol crush after the event. In fact,
I'd appreciate any thoughts...
I've been playing with diagonal backspreads and reverse calendars for IV moves.
On several RC's I've tested, I'v found that the tenor skew change compensates for the 'time vega' to borrow Mo's term. I end up +- break even on trades structured with the earnings dates in the front expiration.
I've been experimenting with standard and ratio calendars (long back,short front) in high vol situations. Very dangerous if you use a near term long options but here I'm using much longer-term long options (6 mo's) - something that isn't showing inflated vols. One indicator is using the lowest average vol month in the chain - often 4-6 months out. Higher debit, certainly, but attempts to sidestep the vol crush after the event. In fact,
I'd appreciate any thoughts...
IV,
I had a question about an earlier post of yours. If you don't mind.... When you talked about doing an RC with earnings in the back month and exiting at front month expiry, I don't get how that works. If you exit before earnings, you don't get the benefit of a vol drop or the stock price move of your long gamma.
I understand your first scenario where you buy near term straddles and hedge vega by selling longer term straddles. You exit right after the release, banking on a large stock move.
What am I missing?
.... and thanks for sharing!
I had a question about an earlier post of yours. If you don't mind.... When you talked about doing an RC with earnings in the back month and exiting at front month expiry, I don't get how that works. If you exit before earnings, you don't get the benefit of a vol drop or the stock price move of your long gamma.
I understand your first scenario where you buy near term straddles and hedge vega by selling longer term straddles. You exit right after the release, banking on a large stock move.
What am I missing?
.... and thanks for sharing!
Thanks IV.
I was talking about your second scenario: exit before report. In that case, your long gamma is nice but you don't get the profit potential of a dramatic post-report move. And you don't get the decline in vols post report. That's the part that has me scratching my head.... Is it that you aim to get in early to benefit from the IV ramp in the back month but hedge theta with short front month? If so, do you ratio them for theta neutral or just do 1:1?
Also, when trying to structure vega neutral trade, you need to make separate assumptions for the declines in volatility - one for each series. For instance, in DNA, the front month declined some 13-14% post-report compared to a 3-ish% decline for the third (Mar) month. I'm inclined to simply assume that the tenor skew will be eliminated and you'd end up at near pre-ramp lows for both series.
I'm really intrigued by these strategies!
I was talking about your second scenario: exit before report. In that case, your long gamma is nice but you don't get the profit potential of a dramatic post-report move. And you don't get the decline in vols post report. That's the part that has me scratching my head.... Is it that you aim to get in early to benefit from the IV ramp in the back month but hedge theta with short front month? If so, do you ratio them for theta neutral or just do 1:1?
Also, when trying to structure vega neutral trade, you need to make separate assumptions for the declines in volatility - one for each series. For instance, in DNA, the front month declined some 13-14% post-report compared to a 3-ish% decline for the third (Mar) month. I'm inclined to simply assume that the tenor skew will be eliminated and you'd end up at near pre-ramp lows for both series.
I'm really intrigued by these strategies!
