strange strange calendar (opinion poll)

[FSU]

As @jamesbp mentioned, put calendars do trade for a credit. In European style options in deep puts you will see this. For example the SPX Dec 21 Dec 19 4200 put spread is trading at over a $70 credit.

I'm not familiar with the security you mentioned, but I assume it is a similar situation.

 

[Baozi]

@jamesbp

ok so, underlying trading at 2.8

ATM puts
15dte put @2.8= 0.0568
141dte put @2.8 = 0.1499


I'm looking at the 3.4 puts,
15dte put @3.4= 0.5986
141dte put @3.4 = 0.5845

interest rate = do you meen the risk free rate to plug in the BSM?

exercise Is european style.

no dividends (there is 1 dividend paid yearly but not in these expiry periods)

 

[jamesbp]

Yes, interest rate to plug into BSM
Also call prices @ 2.80 / 3.40 would be useful

 

[Baozi]

@jamesbp

for the rates you can assume 3%/year

call prices
15DTE call @2.8 =0.0522
15DTE call @3.4 =0.0020
141DTE call @2.8 =0.1910
141DTE call @3.4 =0.0336

 

[jamesbp]

If I have the calculations right for 3.4 strike spreads
... call calendar priced at +0.0316
... put calendar priced at (0.0141)
... time box of 0.0457 suggests implied interest rate of approx 3.90%

If you have access to a risk graph it should show a 'skewed' risk graph
... call / put calendar should have equivalent risk graphs
... max downside risk of (0.0316) ... the premium for buying the call calendar
... max upside risk of +0.0141 ... the premium for selling the put calendar

The max upside / downside risk is logical if you assume that the calls / puts all become virtually worthless when they are FOTM

 

[Baozi]

Thanks..

ok now that you brought in the topic of interest rates I'm starting to think about it..

basically the risk profile of put vs call calendar at same strike is similar, however when you go deep ITM the spread becomes very expensive, and the extra return you get is simply the interest rate difference.. am I understanding it correctly?

If I have the calculations right for 3.4 strike spreads
... call calendar priced at +0.0316
... put calendar priced at (0.0141)
... time box of 0.0457 suggests implied interest rate of approx 3.90%

If you have access to a risk graph it should show a 'skewed' risk graph
... call / put calendar should have equivalent risk graphs
... max downside risk of (0.0316) ... the premium for buying the call calendar
... max upside risk of +0.0141 ... the premium for selling the put calendar

The max upside / downside risk is logical if you assume that the calls / puts all become virtually worthless when they are FOTM

 

[jamesbp]

There is no "extra" return

The difference between the price of the call / put calendar spreads is due to the carry cost ... which in this case is all interest

If the spot remains at 2.80 ... whether you bought the call calendar for a debit or bought the put calendar for a credit ... both spreads will probably lose money

 

[Baozi]

as expected.. no free lunch whatsoever. now I'm happy that I just bought 1 lot...

Anyways.. I will let this thing run until the next shocking tweet by mr.T , get some vega kicker and then close it out.. Will report back here how it goes..

 

[ETJ]

European options?

 

[drmark27]

As @jamesbp mentioned, put calendars do trade for a credit. In European style options in deep puts you will see this. For example the SPX Dec 21 Dec 19 4200 put spread is trading at over a $70 credit.

I'm not familiar with the security you mentioned, but I assume it is a similar situation.

Interesting... I wouldn't have suspected it but I looked at the risk graph and saw this. If you lower the strike to 3500-3600 then it becomes a debit.

And either way, maximal loss at front month expiration will be incurred if the market doesn't rally significantly.