Reverse calendars (RC's) can be very interesting near expiration when you're dealing with earnings announcements. You're making a short term bet that you're going to catch a collapse in volatility or a substantial move in the underlying away from the strike. Or perhaps a blend of both in which case the magnitude of either can be less. IOW, you want to nab more time premium loss in the further month than the near month. And obviously, if there's little to no stock price move, you have a minimal gain or a modest loss. Bloated pigs fit the bill (eg. NTRI occasionally)
Quote from spindr0:
Reverse calendars (RC's) can be very interesting near expiration when you're dealing with earnings announcements. You're making a short term bet that you're going to catch a collapse in volatility or a substantial move in the underlying away from the strike. Or perhaps a blend of both in which case the magnitude of either can be less. IOW, you want to nab more time premium loss in the further month than the near month. And obviously, if there's little to no stock price move, you have a minimal gain or a modest loss. Bloated pigs fit the bill (eg. NTRI occasionally)
An interesting variation is to buy the near month, near the money straddle (or strangle) and ratio write a few extra of the same for the following month (ratioed double RC's - or whatever you wanna call em). You need a decent option model to plot the possibilities in order to select the combo details that you feel comfortable with.
Lastly, you have to make a decent guess as to what the post earnings vol's will be. IVolatility will put you in the ball park but it's still a guess since a chunk of IV collapse occurs with the announcement and then add'l drift follows.
Look for a thread on this here by IV Trader.
He's my reverse calendar hero!
