Your plan was to make money on the downside, but adding the calendar? I wonder if you realize that now if you are right and the market goes down, you will no longer make any money on the downside, unless through vega? It seems you just got nervous and wanted to hedge an upside gap move over the weekend, although such are rare. Perhaps you are aware that you have taken away your downside and will take off your calendar "hedge" Monday morning. But isn't this a very expensive way to "hedge"?
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The Monkey Calendar
- Thread starter cdowis
- Start date
Quote from mysticman:
Your plan was to make money on the downside, but adding the calendar? I wonder if you realize that now if you are right and the market goes down, you will no longer make any money on the downside, unless through vega? It seems you just got nervous and wanted to hedge an upside gap move over the weekend, although such are rare. Perhaps you are aware that you have taken away your downside and will take off your calendar "hedge" Monday morning. But isn't this a very expensive way to "hedge"?
Not to mention that with IBM we just saw a double top at 130 and it looks like resistance might be forming there though it's still a little early to tell.
RSI was over 70 during the day Friday and now has only dropped back to 67 at the close after the underlying dropped $0.50 off the day's high at the end of the session.
The OP's original 135/140 bear call vertical without the calendar hedge would have been a reasonable position. But thanks for the original suggestion; I did go model it in TOS just to see what you were thinking.
Quote from mysticman:
1. Your plan was to make money on the downside, but adding the calendar? I wonder if you realize that now if you are right and the market goes down, you will no longer make any money on the downside, unless through vega?
2. It seems you just got nervous and wanted to hedge an upside gap move over the weekend, although such are rare.
3. Perhaps you are aware that you have taken away your downside and will take off your calendar "hedge" Monday morning. But isn't this a very expensive way to "hedge"?
1. My basic trading style is the calendar. I am now trying to add verticals to diversify the position. So, in this case I started with a vertical, and added the upside calendar to hedge it -- both in delta and vega. Over the 6 to eight weeks of the trade I expect to make money on both the calendar and vertical.
If the market goes down, I plan to carefully add a short put vertical, so I have an IC and calendar combo. As I said, I do not like the IC, so I see this as a way to leg into the trade.
2. You are right. I now realize that I should have started the trade mid-week. I would have waited for the next day.
While you are correct about a weekend gap up, my trading plan requires me to hedge in this case. Just following the rules.
3. Nope. As I said, the basic position is the calendar. In this test case, I started with the vertical since I detected a topping pattern.
Nice observations, and thank you.
Quote from Allspread:
Not to mention that with IBM we just saw a double top at 130 and it looks like resistance might be forming there though it's still a little early to tell.
RSI was over 70 during the day Friday and now has only dropped back to 67 at the close after the underlying dropped $0.50 off the day's high at the end of the session.
The OP's original 135/140 bear call vertical without the calendar hedge would have been a reasonable position. But thanks for the original suggestion; I did go model it in TOS just to see what you were thinking.
I use woodie's cci, as well as the basic support and resistence -- nothing fancy. IBM is really struggling, so it is only a matter of time.
And, yes, the calendar was "unnecessary" but it is part of my overall trading plan. It will go onto the position eventually.
Quote from IV_Trader:
The outcome of this one particular trade means nothing; I was referring to overall concept. Anyway, it was JMO : feel free to delete my posts from your thread
I was not trying to be flippant, just that this is a test trade. My expectation is that it will be profitable, but we shall see.
If you see a prob with the overall concept, I am indeed interested in your ideas.
That's why I started this thread. Not to argue but to get real feedback.
Some of your statements are puzzling to me, so I have to ask what you are doing. Perhaps you can clarify. You don't like ICs, but you plan on having one in this trade by legging in if the market goes down. So do you now like ICs if they are in combination with a calendar?Quote from cdowis:
1. My basic trading style is the calendar. I am now trying to add verticals to diversify the position. So, in this case I started with a vertical, and added the upside calendar to hedge it -- both in delta and vega. Over the 6 to eight weeks of the trade I expect to make money on both the calendar and vertical. If the market goes down, I plan to carefully add a short put vertical, so I have an IC and calendar combo. As I said, I do not like the IC, so I see this as a way to leg into the trade.
2. You are right. I now realize that I should have started the trade mid-week. I would have waited for the next day.
While you are correct about a weekend gap up, my trading plan requires me to hedge in this case. Just following the rules.
3. Nope. As I said, the basic position is the calendar. In this test case, I started with the vertical since I detected a topping pattern. Nice observations, and thank you.
It would make sense to me, if you wanted to combine a calendar with an IC, that the IC be out of the money. You have a good start on this where you are with the call leg now. However, it does not make sense to me to put the calendar also OTM, but rather ATM or where you think the stock is going. Perhaps this trade is not your ideal structure since you didn't start with the calendar, but like I said the calendar is an expensive way to hedge and now sits right on top of the short vertical. Weird. So what is your master plan or ideal position?
If you think that IBM is headed down then the calendar should have been at the 125 strike and you could have hedged the short vertical in many other simpler ways. But since you plan to keep the calendar there, it has become more than a weekend hedge. Taking your words at face value, the calendar is now a permanent part of the position So now if IBM goes down according to your plan, you will not make money and instead it will be only an opportunity to establish the put leg of the IC. So then you will have an IC that happens to have a calendar sitting up at the top leg. That doesn't make sense to me. Tell me again how you like calendars and don't like ICs.
Some traders like to reduce vega and delta exposure of their IC's by adding a calendar at the strike of the long leg of the 'threatened' side - nothing wrong with that. Of course by doing so one gives up some of the profit potential. Perhaps this is the hedge cdowis talks about, except that he has done it in reverse, i.e. long calendar first, short verticals second?
db
db
bullish otm cal is long delta, long vega.Quote from cdowis:
1. Place a bullish calendar, above the market. (the body)
2. Above the body, place a short call vertical. (the tail)
That's it.
The "tail" protects the down side of the calendar, AND it provides some hedge against vega risk (volty moves down) on the upside.
This is an interesting alternative to the double calendar.
short otm call vertical is short delta and short vega.
Both are long theta.
Combine the two and you cut down your delta and vega risks, the exact risk reduction depending on the number of spreads and strike selection, and you collect daily time premium.
However, it's a slightly different trade from the dbl cal and thus one can't really compare them. The dbl cal is a long vega, long theta and, initially, a fairly delta neutral trade. So it benefits from rise in volatility and the passage of time.
db
Talking about the resulting greeks is good. db I agree that this would work toward neutralizing vega and delta exposure.Quote from daddy'sboy:
Some traders like to reduce vega and delta exposure of their IC's by adding a calendar at the strike of the long leg of the 'threatened' side - nothing wrong with that. Of course by doing so one gives up some of the profit potential. Perhaps this is the hedge cdowis talks about, except that he has done it in reverse, i.e. long calendar first, short verticals second?
db
You know traders who routinely add the calendar to their threatened short verticals?
Interesting, and this does make some sense looking at the greeks.
However... according to cdowis at the start of this thread his calendar is not supposed to be at the same strike as the short vertical. Otherwise the "monkey" has no tail. Why not put the calendar ATM 130 strike? This gives a greater theta and less vega. It also gives it more downside delta, but he says that his directional bias is down so that too should be desireable.
The idea of combining a calendar with a short vertical for greek neutralization is interesting and should be explored.Quote from daddy'sboy:
Combine the two and you cut down your delta and vega risks, the exact risk reduction depending on the number of spreads and strike selection, and you collect daily time premium.
However, it's a slightly different trade from the dbl cal and thus one can't really compare them. The dbl cal is a long vega, long theta and, initially, a fairly delta neutral trade. So it benefits from rise in volatility and the passage of time. db
db I don't know how the double calendar got into the discussion. Are you talking about an opening trade or an adjustment?
In any case to be consistent with the existing topside it would have to be again combined with a short vertical.
Let's assume we wanted to open such a position with IBM where it is now around 130 and keeping his existing 135 calendar and short vertical. So we would open the 125 put calendar and 125/120 short vertical. This would be essentially delta neutral with very good theta. The vega is a lot less than with a straight double calendar and it comes directly from the long Octobers being three months out from July. If instead a sequential month calendar were done the vega risk of the whole position could be neutralized as well.
This is an interesting configuration because each side would have 2 shorts at the same strike, one protected by a further out strike and the other protected by a same strike further out in time, thus neutralizing some greek risk.