There is one thing that puzzles me. I set up the spread---buying 1 APR ATM call and selling 1 JUN ATM call. The spread does appear as positive numbers. For instance, the recent bid/ask was 15/17. To place this spread, one has to sell it. So, I sell it for 16. Now, suppose the VIX drops 10% and the ES moves up 50 points (about 5%). What will the bid/ask look like? Having done credit spreads and only realizing the credit received as the max profit, I cannot envision what the reverse call calendar spread's bid/ask will look like. If my understanding is correct, this spread should turn negative when I go to close it (buy it back). If this is true, my broker (IB) has told me that GLOBEX doesn't accept negative bids. So, how would I exit this spread? Second, I am having a hard time envisioning the near-money call far outperforming and covering the loss from the far-money call.
Reverse Call or Put Calendar Spreads--Who uses this strategy?
- Thread starter jwcapital
- Start date
I do iron condors and they have negative bid/ask. I get filled on them no problem.
I appreciate the explanation spindr. I input the parameters into the P&L graph within the risk analyser, and it appears that my profit could be greater than the 16 point credit I received. Is this possible? Or am I truly limited by the credit recieved minus the greater-than-zero buyback?
Given the above example, where the initial credit is 16 and the spread narrowed to 10, giving a 6 pt gain. Is it possible for the value of the near-term to be greater than the value of the far-term? Just having a hard time understanding the P&L graph? Also, the P&L graph shows virtually no loss--with this trade, I am not sure how to calculate the loss. Again, thanks for your help spindr.
Given the above example, where the initial credit is 16 and the spread narrowed to 10, giving a 6 pt gain. Is it possible for the value of the near-term to be greater than the value of the far-term? Just having a hard time understanding the P&L graph? Also, the P&L graph shows virtually no loss--with this trade, I am not sure how to calculate the loss. Again, thanks for your help spindr.
I did forget to mention one other thing that is important--this spread is to be exited 30 days prior to the expiration of the near-term option. Therefore, the loss will be much smaller than anticipated. I do understand, if the spread is held to expiration, that the loss will be much higher. I do agree that the P&L graph must top out at the credit, more or less. I do see that the huge move upward of the underlying/huge volatility crush will cause the spread to narrow. In addition, huge move downward will cause the spread to narrow, for the far-term call will lose value much quicker than the near-term. Since I am exiting 30 days prior to expiration, time value really doesn't present a problem. Thanks again spindr.
Do you believe this spread is a better play coming off a volatility spike than a bull put spread, iron condor, iron butterfly, short strangle/straddle (other short volatility plays)?
Do you believe this spread is a better play coming off a volatility spike than a bull put spread, iron condor, iron butterfly, short strangle/straddle (other short volatility plays)?
Reverse call calendar spread â I guess what you are saying: instead of selling the front month you will be buying the front month? And instead of buying the back month you will be selling the back month. So what do we have? A credit call calendar spreadâ¦
If volatility increases you have a problem and if volatility decreases you are looking good. As the stock or ETF moves down in price although you might think you might be making money at that point, it might not be true because as the stock moves down the volatility increases and due to the increase in volatility on your naked call you could still lose money short term. If the stock goes up in price, but not far enough to breakeven or make money, you can be losing money again.
So the way to make money in this strategy is by having large moves up or down in the stock or ETF. I donât really think this is a good strategy, if this was the way you were going to do it (If you do it for even money you might be looking a little bit better)
If volatility increases you have a problem and if volatility decreases you are looking good. As the stock or ETF moves down in price although you might think you might be making money at that point, it might not be true because as the stock moves down the volatility increases and due to the increase in volatility on your naked call you could still lose money short term. If the stock goes up in price, but not far enough to breakeven or make money, you can be losing money again.
So the way to make money in this strategy is by having large moves up or down in the stock or ETF. I donât really think this is a good strategy, if this was the way you were going to do it (If you do it for even money you might be looking a little bit better)
Quote from Financial Saint:
If volatility increases you have a problem and if volatility decreases you are looking good. As the stock or ETF moves down in price although you might think you might be making money at that point, it might not be true because as the stock moves down the volatility increases and due to the increase in volatility on your naked call you could still lose money short term. If the stock goes up in price, but not far enough to breakeven or make money, you can be losing money again.
Every strategy has the potential to lose. Or win. That's what makes a risk graph
So the way to make money in this strategy is by having large moves up or down in the stock or ETF. I donât really think this is a good strategy, if this was the way you were going to do it
This strategy makes money from a large move in price AND/OR a contraction in implied volatility. Like everything, you have to utilize it in the right circumstances. EA's ?
(If you do it for even money you might be looking a little bit better)
Do what for even money? It's an initial credit position.
Thank you for saying the same think