Reverse Call or Put Calendar Spreads--Who uses this strategy?

[jwcapital]

Yesterday, I read an article about reverse call calendar spreads. Anyone use this strategy? Your long call--do you use one with 60 days until expiration? Your short call--do you use one with 90 or 120 days to expiration? Do you have any trouble executing this spread at a fair price or are the bid/asks too wide and you have to hit the bid? This looks like a great spread--on paper--to take advantage of volatility spikes that then reverse into a volatility crunch and upward movement of the underlying.

If you do place reverse calendar spreads, do you prefer using puts or calls?

 

[thegazelle]

Margin doesn't offset last time I looked at this with TOS.

 

[spindr0]

I've used em quite a bit for EA's a week or so before expiration except it's both sides and ratioed. The closer to expiration, the better since the long legs are throwaway money.

Like all spreads, you have can take market prices or work them for better fills. I would avoid options with very wide B/A spreads because you might get a good entry fill but if you have to get out quickly, you'll pay through the nose.

I would not use a 60 day long since it will also be afected by IV change. But it depends on what you're chasing via your strategy.

Is the article available online?

 

[jwcapital]

An Option Strategy for Trading Market Bottoms
at http://www.investopedia.com/articles/optioninvestor/02/081902.asp

Here is the link. Couple other things. I trade with IB. Using the ATM 60-day and 120-day expiration calls, the bid/ask for the spread wasn't very wide (maybe a point to a point and a half). Also, SPAN margin requirement was incredibly low--like a couple hundred for one of these spreads.

 

[stevegee58]

Are you using portfolio margining? I haven't heard of SPAN before.

Normal margining would treat a spread like this as if the shorts were naked so your margin would be gobbled up quickly.

The risk graph is similar to a straddle, but without the potential of a volatility crush i.e. a sudden drop in IV killing the position. They'd be a good substitute for a straddle for earnings plays, I'd think since IV drops right after earnings and there's generally a good move.

 

[TraderTactics]

The reverse calendar spread is not neutral and can generate a profit if the underlying makes a huge move in either direction.

 

[MathAndLogic]

Quote from stevegee58:

Are you using portfolio margining? I haven't heard of SPAN before.

Normal margining would treat a spread like this as if the shorts were naked so your margin would be gobbled up quickly.

The risk graph is similar to a straddle, but without the potential of a volatility crush i.e. a sudden drop in IV killing the position. They'd be a good substitute for a straddle for earnings plays, I'd think since IV drops right after earnings and there's generally a good move.

Agreed. If your analysis is right, it may be better to use other strategies without being restrained by margin requirements.

 

[MTE]

Quote from stevegee58:

Are you using portfolio margining? I haven't heard of SPAN before.

Normal margining would treat a spread like this as if the shorts were naked so your margin would be gobbled up quickly.

The risk graph is similar to a straddle, but without the potential of a volatility crush i.e. a sudden drop in IV killing the position. They'd be a good substitute for a straddle for earnings plays, I'd think since IV drops right after earnings and there's generally a good move.

SPAN is used in futures and futures options. It's similar to portfolio margining.

 

[jwcapital]

SPAN margin requirements are relatively low for reverse call calendar spreads (matter of fact, it is the lowest requirement for any spread I have ever done)....therefore the returns on margin are incredibly high when they are successful. I would trade them using a VIX chart only. Take a look at the volatility spikes--one that approach six-month highs as well as recent spikes that approach near-month highs. Recently, the VIX spiked to 30 on February 5, 2010. I believe the ES (s&p 500 mini futures) dropped to 1040. That was the time to place a reverse call calendar spread--say buy the 1040 April call and sell the 1040 June call. As you can see, the VIX dropped from 30 to 22.3 today and the ES rose from 1040 to 1097 today. Looks like a high percentage trade to me. It is easier to recognize volatility spikes than index bottoms. Can't really be as sure of a volatility pop when the VIX is low, for there are no volatility spikes at the bottom of VIX charts like there are at the top.

 

[beteslefent]

Certainly. All above told the truth. We can communicate on this theme.