Selling Calendars and Diagonals

[mike007]

Can anyone explain why it costs so much more margin to sell calendar and time spreads. Is it just basically the vol risk that makes them "expensive" to sell? Thanks.

 

[MTE]

The reason is that when you go long the front month and short the back month, the back month short is considered naked as it expires after the long one.

 

[spindr0]

Reg T defines "covered for margin" purchases for a call writer as being long the underlying stock or long a call with the same expiration or longer with the same exercise price or lower. For a put it's short the underlying stock or long a put with the same expiration or longer with the same exercise price or higher.

So for a short call calendar, while you are "covered as a writer", the powers that be consider the position to be a long call and a naked call and as you know, the margin for nekedness is greater.