Reverse OTM put calendar spread, criticize my strategy

Timetwister said:
Well, in this case I'm long the front month (week in this case), so that's not a problem. It is indeed, but because the sold position is much higher in nominal terms, so the IV of the first one would have to increase much more than the second one to win money that way (and I'd have to close the bought put before expiration, to profit from that IV increase).
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So, your thinking of doing a Reverse Calendar in the course of a normal market? Not a lot of things beat the efficiency of a butterfly/straddle to just go long vol except maybe for the Vix, but I am not sure about that either.

Here is your spread as a 10x10 (expressed with an SPX 5x5) and volatility shocks are exaggerated for illustration. You can disregard the right side of the blue V and left side of the tan V since these vol scenarios are unlikely. This trade is capital intensive and commission intensive. Theta is miniscule 66 (a week prior to expiration) compared to the potential adverse vol shock. Not a lot of things to like.

You might want to look at old threads by convexx on how he would trade these situationally.


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The day prior to exp. Theta is 287. Though, playing up close like this, theta should be an afterthought. I would rather punt a vol etf.

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xandman said:
So, your thinking of doing a Reverse Calendar in the course of a normal market? Not a lot of things beat the efficiency of a butterfly/straddle to just go long vol except maybe for the Vix, but I am not sure about that either.

Here is your spread as a 10x10 (expressed with an SPX 5x5) and volatility shocks are exaggerated for illustration. You can disregard the right side of the blue V and left side of the tan V since these vol scenarios are unlikely. This trade is capital intensive and commission intensive. Theta is miniscule 66 (a week prior to expiration) compared to the potential adverse vol shock. Not a lot of things to like.

You might want to look at old threads by convexx on how he would trade these situationally.


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I haven't said that I wanted to go long volatility. I was just asking whether the difference between premium/days was exploitable in any way. But from what newwurldmn has said, I think I understand the reason of that premium/days difference between expirations.

Now I wonder why in the case of ATM options the premium/days goes the opposite way, I'll probably open another thread about that.

Thanks for posting the simulation. Could you please clarify what's the multiplier of that position? I guess it's 100 (so maximum loss would be about $90 if the price finishes exactly at 1950 and volatility increases).
 
xandman said:
$8,000/$50.00 per ES pt. ==> 160 points in the ES ==> 16 ES pts per spread
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$18 is the maximum loss (9000/50)? If I traded this specific spread, I would consider that the maximum loss is much higher, like $40 (a combination of finishing at $1950 and IV rising a lot, which makes sense for such an enormous drop in just 2 days). And then, I would risk only a small part of my account, so I'd need at least $200 per straddle (so $10000 per ES straddle). Then I'd need to calculate the expected return of this position to estimate whether it's worth opening it. It probably isn't.

What I hate about reverse calendar spreads is that it's very hard to estimate how much is the maximum possible loss, as you have to consider changes in both the underlying's price and implied volatility. And without knowing that, I can't determine any bankroll management rules.
 
Considering 1000/50 ==>20 pts on the ES ==> 2 pts gain ES per spread.

16:2 /8:1 loss ratio is quite palpable. If your long vol/gamma, you may want to be on the high end of that payoff ratio.

In a normal market, it's a "best of both worlds"/"Have your cake and eat it spread". Long vol/ short to minimal theta. It doesn't work to well with day to day options trading. I again emphasize the situational use which I have yet to execute flawlessly myself. Additionally, the risk reversal is much easier to execute at the cost taking a more directional view.
 
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What is "ES"? Google gives me "Eversource Energy", as by Bloomberg or Yahoo but the price is in the $50 range and Timetwister says "with ES at about $2098.75 right now".
 
Timetwister: "Why not selling the second expiration while buying the first one"?

You look at prices but they are deceiving. Your PNL is not -0.125 on the first term and +0.725 on the second. First expiration costs more than 32% in volatility terms. Second expiration produces less 27%. Your trade is locking yourself into a loss, the average PNL is negative, at least -5% volatility.
 
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