SURE WIN : Calendar and Reverse Calendar Spread

[benysl]

Quote from optioncoach:

I forgot that OptionVue does not model end of month expiration options on futures on ES so I cannot create a risk graph.

Here is the scenerio then you suggested:

Trade number 2 (Calendar Spread)
I sell the ES (expire on 14 June) 1560 Put for 48.50 points
I buy the ES (expire on 29 June) 1560 Put for 41.50 points
Net credit receive =+7.00

Assume that at expiration (forget SET for right now and treat it like how equity options expire) of normal JUNE future options, that ES is at 1520. The regualr ES options will have an intrinsic value of 40.00 points. The end of the month JUNE options will have premium of intrinsic and time value premium of, I estimate to be about 32.00 when you assume the SEPT contract will have a premium of about 10 points over the expiring JUNE spot value.

If you were to close this out at expiration you would pay 40.00 points to cover the expiring JUNE future and sell the JUNE EOM options for 32 for a net DEBIT of 8 points. Give or take a point here on my assumption of the EOM JUNE option, you will not have any profit unless the underlying moves closer to the DITM strike of 1560. This is how any deep ITM put calendar spread woud work.

So this bullish bias spread works if ES makes a large move to 1560 by expiration theoretically but I cannot show you a risk graph. If the market stays where it is , moves slightly higher, or moves lower you have a loss.

if it is on the june expiration. Then it is really a sure win trade. Cos whatever losses happen on my sold leg is cover by my buy leg. and the fact is my buy leg is cheaper than my sell leg. I already have a 7.00 credit in my pocket. And if market did rally above 1560, my sold leg expire worthless while my buy leg is still there since it is the far month.

But in trading this scenario do not happen, and yes I overlook the portion of 29th june expire option reference to the Sept contract. And so I cut my trade number 2 last friday with a 1 points loss.

Thank you all guru out here for pointing it out to me.

 

[domestic]

Quote from rallymode:

What? You don't just sell premium??

and i though you knew me better.....

 

[domestic]

Quote from spindr0:

If we're talking about RC's, by definition, it has to be a credit and more so if you're ratioing it. That credit is what you're trying to capture.

No, I gave up the Yahoo circus a few months back. Absolute morons ruined a good forum for exchanging ideas. Do I know you by another handle?

Spin

i was there from the beginning. you hung in longer; i guess you have more patience than me. we had talked before, i just don't remember my handle. i will say, all conversations were constructive and civil!

 

[Wayne Gibbous]

I was there from nearly the beginning. Used to be a decent forum. Much better than any other YHOO msg board imo.

I remember Spin, Virginia and much later, op coach. And remember that scammer Joshua Fry?

Ah, the good ole dayz...

 

[arizonadreamer]

Quote from Wayne Gibbous:

I was there from nearly the beginning. Used to be a decent forum. Much better than any other YHOO msg board imo.

I remember Spin, Virginia and much later, op coach. And remember that scammer Joshua Fry?

Ah, the good ole dayz...

Oh the good ol' days. I have not visited the Yahoo boards in a while.

I learned quite a bit from a few posters . . .

AZD

 

[arizonadreamer]

Oh, and a quick question for anyone:

Has anyone ever (or are they able to) negotiate with their broker to do a reverse calendar and NOT have the short leg be calculated as a naked position?

Imagine the leverage . . .

AZD

 

[deviltrader]

Quote from thecalip:

There is no such thing as risk free trade in options

there is such a thing but they are hard to find. they are diamonds in the rough.

 

[opt789]

Quote from arizonadreamer:

Oh, and a quick question for anyone:

Has anyone ever (or are they able to) negotiate with their broker to do a reverse calendar and NOT have the short leg be calculated as a naked position?

Imagine the leverage . . .

AZD

It's called portfolio margin and it's been available at IB for over a month and TOS is adding it now. You could have been doing it at prop firm before this.

 

[arizonadreamer]

Quote from opt789:

It's called portfolio margin and it's been available at IB for over a month and TOS is adding it now. You could have been doing it at prop firm before this.

So with portfolio margin, will a reverse calendar be treated the same as a regular calendar? This would mean unlimited $$$ credit on RCs if true.

If not, could you provide an example of the actual margin requirements?

Let me put out some hypothetical numbers:

company ABC trading at $40
Buy to open near month 40 Calls at 1.5
Sell to open further out month 40 Calls at 3.5

Credit of $2

Let's assume that this is the only position in the account, so it will be a "concentrated" position.

I have a hard time believing traders can do as many contracts as they please.

What will portfolio margin do for you here?

AZD

 

[opt789]

AZD,
Portfolio Margin is a change in the rules that gives the retail broker the right to charge you the same haircut requirement as an option market maker. As we have seen from IB already, they are making you cover more than the minimum and have concentration limits. For specifics I would suggest you contact the broker, you can also use IB's demo system on their site. I am guessing every broker will do things a little different but it is still too early to tell. By the way, you have to maintain 100k so you shouldn't even think about it unless you have at least 150k.

If you do not understand the methodology of the OCC's TIMS Risk Based Haircut requirements then you should just stick to Reg-T because you will be looking for simple answers to your margin questions and there are no simple answers. Portfolio margin, with regard to many option positions, will change each and every day, sometimes it will change dramatically and you wont know why (unless you understand TIMS).

Yes you can do reverse calendars, yes it will appear that you can do a lot of them for not much margin, but then your margin will change more and more. I would not recommend using PM unless you have your own dynamic risk analysis software to show you every possible outcome of stock and vol movement over the life of the position. Otherwise you will find yourself constantly out of line with the new rules and your broker will be liquidating your position. Even if you have the software you still need to understand TIMS, you may be unpleasantly surprised when the TIMS system changes your requirements one day without your basic risk software anticipating it.

If you think that reverse calendars are some new strategy that can be exploited for easy gains then you need to do a little more studying. Every market maker and prop trader (that works at a firm that allows options) has been able to do them for a very long time. There are many possible outcomes that cause you to lose money, and if you try to maximize margin then you can just lose all your money that much faster.