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Reverse Call or Put Calendar Spreads--Who uses this strategy?
- Thread starter jwcapital
- Start date
A point I think I am not getting across: I am limiting this strategy to when volatility spikes occur--and I think we all can recognize a volatility spike. I do not believe this is a strategy to be placed routinely without thought. If placed at a volatility spike, it has a much greater chance of success. For example, on February 8th of this year, volatility spiked. The high was 27.11. The s&p 500 emini closed at 1056. The day before, if you were keenly watching the vix, the emini put in a low around 1040. So, suppose one placed a reverse call calendar spread at 1055 (buying the April 1055 call and selling the June 1055 call). I probably would have exited this spread last Friday (Feb 19), the latest. On Friday, the vix closed around 20, and the emini closed at 1106. So, the vix decreased by a little over 25% and the emini increased by about 4.2%. I would guess that the spread would have been profitable. I certainly wouldn't place a reverse call calendar spread now, given the relatively low vix (compared to the last six months).
There are some good option strategies, but this is not one of them.
(I will fix the spelling next time)
(I will fix the spelling next time)
Question -
If I'm buying the front month and selling the back I'm getting a credit up front. Great. But am I missing something?
If the stock price passes the strike am I guaranteed to be exercised?
Reason I ask is if the stock skyrockets and I'm not exercised, doesn't that make the next months "roll" super expensive?
I guess when I first thought of this trade I was protected the entire way, but in this sense, am I naked?
If I'm buying the front month and selling the back I'm getting a credit up front. Great. But am I missing something?
If the stock price passes the strike am I guaranteed to be exercised?
Reason I ask is if the stock skyrockets and I'm not exercised, doesn't that make the next months "roll" super expensive?
I guess when I first thought of this trade I was protected the entire way, but in this sense, am I naked?
Quote from bluesdave:
Question -
If I'm buying the front month and selling the back I'm getting a credit up front. Great. But am I missing something?
If the stock price passes the strike am I guaranteed to be exercised?
Reason I ask is if the stock skyrockets and I'm not exercised, doesn't that make the next months "roll" super expensive?
I guess when I first thought of this trade I was protected the entire way, but in this sense, am I naked?
Couple things. I trade the s&p 500 emini futures options, so no chance of early assignment. Second, regarding using a stock as the underlying--there is no guarantee that you will be assigned early on the back-month option..as a matter of fact, you probably wouldn't anyway. The front-month option is yours to exercise--which you won't do. So, you really have nothing to worry about. There is no roll. You are placing the buy April ATM call and the sell Jun ATM call simultaneously. You will receive a credit. As the stock takes off and/or the volatility shrinks, your credit spread will narrow--allowing you to see a profit. The increase in the value of the long will exceed the increase in value of the short.
First let me apologize for asking so many questions.
But something about this concerns me.
I'm asking in context of the April / June example.
For example - the stock trading @ 97 and the trade date is March 20.
We said:
Buy the April call - front month - 100 strike
Sell the June call - back month - 100 strike
If the stock goes to 120 April15, am I not in a really dangerous position? The call I sold has 2 months left - and he has no reason to cash in. He can let it go to 140 over the next month.
I however - own a 100 call that expires in a few days.
How do I buy the next months 100 strike when it's 20 in the money? At that point, as far as I see, I'm naked.
Don't mean to be dense - but if this is a pitfall in the strategy I'd like to understand it.
But something about this concerns me.
I'm asking in context of the April / June example.
For example - the stock trading @ 97 and the trade date is March 20.
We said:
Buy the April call - front month - 100 strike
Sell the June call - back month - 100 strike
If the stock goes to 120 April15, am I not in a really dangerous position? The call I sold has 2 months left - and he has no reason to cash in. He can let it go to 140 over the next month.
I however - own a 100 call that expires in a few days.
How do I buy the next months 100 strike when it's 20 in the money? At that point, as far as I see, I'm naked.
Don't mean to be dense - but if this is a pitfall in the strategy I'd like to understand it.
Early assignment is the best thing that could happen because that would mean that you'd be booking the entire credit. But you're not likely to be assigned early if there's any time premium remaining in the short option and that's not going to happen because the size of the move would have to be huge to drive the 2nd month to parity (no time premium).Quote from bluesdave:
If the stock price passes the strike am I guaranteed to be exercised? Reason I ask is if the stock skyrockets and I'm not exercised, doesn't that make the next months "roll" super expensive?
I guess when I first thought of this trade I was protected the entire way, but in this sense, am I naked?
If the stock skyrockets, you book your gain. Close position. Done. It is possibile that if you expected/spotted a reversal, you could roll and book the profitable side but that's far TMI at this point.
Okay, let me try it this way, Either way, thanks for trying spndr.
Early assignment is the best thing that could happen because that would mean that you'd be booking the entire credit.
(true - That would be great. The call I sold and the one I bought are both expensive. I win. )
But you're not likely to be assigned early if there's any time premium remaining in the short option
(my short option is the back month, right? That means there's plenty of time left. Moreover, I MUST have a long call equal to the strike for each month of the short call, or I'm naked)
and that's not going to happen because the size of the move would have to be huge to drive the 2nd month to parity (no time premium).
If the stock skyrockets, you book your gain. Close position. Done.
(yes, I've been lambasted. Here's the crux of my question.
What happens when the stock skyrockets the day or week before the short expiration?)
Early assignment is the best thing that could happen because that would mean that you'd be booking the entire credit.
(true - That would be great. The call I sold and the one I bought are both expensive. I win. )
But you're not likely to be assigned early if there's any time premium remaining in the short option
(my short option is the back month, right? That means there's plenty of time left. Moreover, I MUST have a long call equal to the strike for each month of the short call, or I'm naked)
and that's not going to happen because the size of the move would have to be huge to drive the 2nd month to parity (no time premium).
If the stock skyrockets, you book your gain. Close position. Done.
(yes, I've been lambasted. Here's the crux of my question.
What happens when the stock skyrockets the day or week before the short expiration?)