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

Quote from bluesdave:

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)

By definition of what covered means, yes, you're naked. That's only an issue if you don't have available margin or approval for naked options. But your position is hedged by the near month until the near month expires.


Here's the crux of my question. What happens when the stock skyrockets the day or week before the short expiration?)

As long as IV doesn't expand, if the stock skyrockets, the spread narrows which is what you want (the difference in value b/t the two options decreases).

You can see this effect by looking at any option chain.
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Quote from Financial Saint:

Right as always. Find a circumstance and I can find you half a dozen option strategies, that doesn’t mean that all six are equally good for that type of market.
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And that's exactly the point that you missed previously. The strategy that you say isn't equally good for that type of market isn't a bad strategy. It's just not the appropriate one for the circumstances at that time.
 
spindr - thanks for your rockin explanation.

For instance - I'm not trading in a margin approved account and can't sell naked anything. Pretend that I was investor with $1500 looking for strategies. That doesn't buy you alot of coverage, so I have to be creative with leveraging.
 
Quote from bluesdave:

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

EXCUSE THE CAPS, BUT THE COMMENTS WILL BE EASIER TO READ. THIS IS NOT A CORRECT TRADE. IF YOU RE-READ, YOU WANT YOUR NEAR-MONTH OPTION EXPIRING AT LEAST 60 DAYS FROM THE DATE OF EXECUTION OF THE SPREAD--YOU DO THIS, FOR YOU ARE EXITING THIS SPREAD 30 DAYS PRIOR TO EXPIRATION OF THE NEAR-TERM OPTION. SO, LET'S SAY YOUR STOCK IS AT 97 AND THE DATE IS MARCH 19TH. I WOULD BUY THE MAY 100 CALL AND SELL THE JULY 100 CALL FOR A CREDIT. AGAIN, I WOULD ONLY PLACE THIS TRADE AFTER A VOLATILITY SPIKE (STOCK PROBABLY DROPPED 4-5% TO 97).

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.

SEE ABOVE. THE NEAR-TERM CALL'S GAIN WILL OUTPACE THE FAR-TERM CALL'S LOSS. I WILL EXIT THIS SPREAD NO LATER THAN APRIL 16TH, ABOUT 30 DAYS BEFORE THE EXPIRATION OF THE MAY CALL. AS YOU KNOW, THE TIME FROM THE SPIKE TO A RETURN TO THE NORM CAN HAPPEN QUICKLY--SO I WOULD BE READY TO EXIT THE SPREAD MUCH SOONER.

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.
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NO PROBLEM. YOU'RE JUST NOT SEEING THE MECHANICS NOR THE TIMING, NOR THE REACTION OF THE CALLS TO THE MOVEMENT OF THE UNDERLYING OR THE IV.
 
Regarding Margin. This spread requires extremely little margin--again, I trade the s&p 500 emini. Therefore, I am bound to SPAN margin. To give you an idea of the margin equirements:

You need $5300.00 to buy or sell 1 s&p 500 emini futures contract. To place an ATM call or put, you require the same amount. Obviously, the further OTM and the more hedged the trade is, the lower the required margin. The required margin to place one reverse call or put calendar spread is about $900.00. As you can see, the return on margin can be quite high.
 
NO PROBLEM. YOU'RE JUST NOT SEEING THE MECHANICS NOR THE TIMING, NOR THE REACTION OF THE CALLS TO THE MOVEMENT OF THE UNDERLYING OR THE IV.

WELL THANK YOU CAPTAIN OBVIOUS.
Any semblance of constructive criticism was gone with inclusion of the caps. I've removed a lot of my reply because it's possible in your own twisted way you're trying to help.

By the way - I really wasn't apologizing to you. I was apologizing to everyone who actually helped me, like spindr0. He understands that it's human nature to try understand things at one's own pace, and answered my question.
 
Quote from bluesdave:

WELL THANK YOU CAPTAIN OBVIOUS.

Any semblance of constructive criticism was gone with inclusion of the caps. I've removed a lot of my reply because it's possible in your own twisted way you're trying to help.
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IF YOU WANT PEEPS TO HELP YOU, YOU SHOULD PLAY NICE... EVEN THO I'M PROBABLY BE THE LAST ONE WHO SHOULD SUGGEST THIS :)
 
Quote from jwcapital:

NO PROBLEM. YOU'RE JUST NOT SEEING THE MECHANICS NOR THE TIMING, NOR THE REACTION OF THE CALLS TO THE MOVEMENT OF THE UNDERLYING OR THE IV.
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Not that it's of any great importance to you but if you want to highlight your text instead of using CAPS, bracket your comments with a b and a /b in brackets. I can't type them in correct order since they do their thing rather than show as text so reverse the two below

[/b] your written text
 
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