Thoughts on ITM calender calls

[acen1975]

Quote from spindr0:

They're the same.

An easy way to see this is to model the positions. Buy the OTM calendar and sell the ITM calendar. Use fair prices. The graph over time and price will be a straight line at ZERO indicating that there's no potential gain or loss. That means that the positions are synthetically equivalent - what one makes, the other loses and vice versa.

yes,at first look they are the same.....syntetics......but if you look deeper,there will be for sure a difference....because of the volatility change.
OTM put callendar will gain more than the ITM call during the fall,because most of the time with a fall volat. rises and will apriciate the OTM spread more,than the ITM......till the the fall gets to the strike of the spread.
expecially if a trader is hedged and wants to get out of the spread before the underline hits the strike,OTM put is the better choice,not because of something else,but because of the spike in IV if the move occures.

ectually ITM callendars is good to be used ,when looking for uptrend.
with the rise of the underline,IV ussually falls,so part of the gain of the OTM call callendar is eaten off from the fall of IV......so in that case is better to use ITM put callendar......

 

[atticus]

Quote from acen1975:

yes,at first look they are the same.....syntetics......but if you look deeper,there will be for sure a difference....because of the volatility change.
OTM put callendar will gain more than the ITM call during the fall,because most of the time with a fall volat. rises and will apriciate the OTM spread more,than the ITM......till the the fall gets to the strike of the spread.
expecially if a trader is hedged and wants to get out of the spread before the underline hits the strike,OTM put is the better choice,not because of something else,but because of the spike in IV if the move occures.

ectually ITM callendars is good to be used ,when looking for uptrend.
with the rise of the underline,IV ussually falls,so part of the gain of the OTM call callendar is eaten off from the fall of IV......so in that case is better to use ITM put callendar......

Everything you're written here violates the time-box (roll market). I will give you an example of vertical (strip) parity to keep it simple:

XYZ at 52
30-days to expiration.
Zero risk-free rate/carry/Euro

50C at 4
50P at 2

Buy stock at 52
Sell call at 4
Buy put at 2

You're long natural shares from 52, short synthetic shares from 52. This conversion arbitrage is the empirical proof of same-strike vol-equivalence. It's also used to arrive at daily settlements for futures options, so there are practical applications beyond those undertaken by arb-traders. You can solve for a put or call price if you have the spot price, implied-forward and call or put value. There are exposures to rates in the roll-market, but it's of zero consequence to the outright trading of vol in calendars.

Does it matter that you're preferentially trading the put over the call? No, not really, but don't convince yourself that there is an advantage to either.

 

[spindr0]

Quote from acen1975:

yes,at first look they are the same.....syntetics......but if you look deeper,there will be for sure a difference....because of the volatility change.

You can hypothesize any number of scenarios but if the options are fairly priced from the same volatility number (albeit higher or lower), there's no difference if the underlying rises or falls, time elapses or people write with their left hand.

Here's crazy one for you. A call is .90 by 1.00 and some moron places an order to buy 500 at 1.50. Furthermore, suppose the total market size on the ask side is less than 500 and all of it is below 1.50. You can bet that everyone is going to step in and the flls are going range from 1.00 up to 1.50. So what happens to synthetics now?

 

[spindr0]

Quote from atticus:

You're long natural shares from 52, short synthetic shares from 52. This conversion arbitrage is the empirical proof of same-strike vol-equivalence. It's also used to arrive at daily settlements for futures options, so there are practical applications beyond those undertaken by arb-traders. You can solve for a put price if you have the spot price and call value, and vice-versa.

Was this trade executed in the morning or in the afternoon???

 

[acen1975]

Quote from spindr0:

You can hypothesize any number of scenarios but if the options are fairly priced from the same volatility number (albeit higher or lower), there's no difference if the underlying rises or falls, time elapses or people write with their left hand.

Here's crazy one for you. A call is .90 by 1.00 and some moron places an order to buy 500 at 1.50. Furthermore, suppose the total market size on the ask side is less than 500 and all of it is below 1.50. You can bet that everyone is going to step in and the flls are going range from 1.00 up to 1.50. So what happens to synthetics now?

i dont argue,that they are different....they are the same position.
what i was sayng is that they will change a little differently because of the IV.
even with a slight move down,supported with a spike in IV with 5%,the profit of OTM put callendar might make 2 times more profit,that the ITM calendar.....and even more,if there is a bigger difference between the months of the callendar......
if the ITM makes 10% profit,ATM might make 20%.......
but still they are the same..........
i am talking about equity or comodity options,not about currency,because there IV spikes diffrently.......

about your question....why somebody would buy at 1.5,when the ask is 1?
such a people dont survive very long around......
still,i dont know what will happen in such an enviroment.may be is there is no one to respond to his order,the local will synteticly "produce" conversion....if the order is call options-filling the order will materialize as rise of the underline and cheaper puts-eather fall in IV,eather volatility skew,depending of the mood of the MM.....am i rignt?
sorry about the bad spelling .english is not my birth language

 

[acen1975]

Quote from atticus:

.

Does it matter that you're preferentially trading the put over the call? No, not really, but don't convince yourself that there is an advantage to either.

i wasnt talking about currency options,but equity.
ussually with a fall you have 90% chance,that IV will rise.why not to use this advantage in you favor?
with currency options you are rignt-you cannot predict the change in IV,so it really doesnt matter.
but have a look whats happening with the VIX when SPX starts falling

 

[spindr0]

Quote from acen1975:

[ what i was sayng is that they will change a little differently because of the IV.

even with a slight move down,supported with a spike in IV with 5%,the profit of OTM put callendar might make 2 times more profit,that the ITM calendar.....and even more,if there is a bigger difference between the months of the callendar......
if the ITM makes 10% profit,ATM might make 20%.......
but still they are the same..........
i am talking about equity or comodity options,not about currency,because there IV spikes diffrently.......

I disagree.

If you wish to prove your point, present numbers which anyone here can verify or refute. Language will be no barrier. Pick a stock and a strike price as well as an IV. Calculate the fair value prices of each leg of the ITM and OTM calendars. Determine the net cost... which will be the same for each calendar.

Then tell me at what stock price and IV at what point in time you want to evaluate. Calculate the new values. Show us a 2 times profit scenario.

Got numbers?

 

[spindr0]

Quote from acen1975:

about your question....why somebody would buy at 1.5,when the ask is 1? such a people dont survive very long around......
still,i dont know what will happen in such an enviroment.may be is there is no one to respond to his order,the local will synteticly "produce" conversion....if the order is call options-filling the order will materialize as rise of the underline and cheaper puts-eather fall in IV,eather volatility skew,depending of the mood of the MM.....am i rignt?
sorry about the bad spelling .english is not my birth language

Why would someone buy at 1.50 when the ask is 1? Bad orders occur. SHIFT happens on a lot of keyboards. Dumb money is a gift to traders.

What will happen in such circumstances? Everyone in range will pounce on the order and fill it. Nothing earth shaking will occur. IV won't change. The underlying won't change. Skew won't materialize. It won't be reported to the SEC nor will CNBC be doing a special report. As soon as the clown is filled, the price probably will revert to .90 by 1.00 and for everyone not getting a piece of the dumb money, their synthetics will toddle along merrily, moving in lock step together, up and down, just as they did before.

 

[acen1975]

Quote from spindr0:

I disagree.

If you wish to prove your point, present numbers which anyone here can verify or refute. Language will be no barrier. Pick a stock and a strike price as well as an IV. Calculate the fair value prices of each leg of the ITM and OTM calendars. Determine the net cost... which will be the same for each calendar.

Then tell me at what stock price and IV at what point in time you want to evaluate. Calculate the new values. Show us a 2 times profit scenario.

Got numbers?

just use a calculator.
last week,with the fall of S&P from 1011 to 980 within couple days,volatility rose from 24 to 29,which is 20%.
so put the numbers in the calculator-a drop of 30 ticks,and change the volatility-once 24,once 29.......
and use let say 900 strike of the spread......you will be surprised.....

as you know time spreads are also volatility spreads-when the spread is ITM there's almost no extrinsic value-the deltas are close to 1,so IV almost doesnt make any good or damage to the spread.........but if the spread is OTM with 100% extinsic.....is totally different story.
IV kicks in strong.
notice that i am talking if the move is small,and IV rises.....if the move goes all the way to the strikes,it really doesnt matter-than it will be the same,but not during the move,when the spread is still away-in that case the value of the spreads will be slightly different,and this difference will be accounted for,from the change in IV

 

[atticus]

Quote from acen1975:

just use a calculator.
last week,with the fall of S&P from 1011 to 980 within couple days,volatility rose from 24 to 29,which is 20%.
so put the numbers in the calculator-a drop of 30 ticks,and change the volatility-once 24,once 29.......
and use let say 900 strike of the spread......you will be surprised.....

as you know time spreads are also volatility spreads-when the spread is ITM there's almost no extrinsic value-the deltas are close to 1,so IV almost doesnt make any good or damage to the spread.........but if the spread is OTM with 100% extinsic.....is totally different story.
IV kicks in strong.
notice that i am talking if the move is small,and IV rises.....if the move goes all the way to the strikes,it really doesnt matter-than it will be the same,but not during the move,when the spread is still away-in that case the value of the spreads will be slightly different,and this difference will be accounted for,from the change in IV

This is 100% inaccurate. Please model any same-strike SPX put and call calendar to expiration. They are completely fungible.