I've been studying options for a while now and have been researching calendar straddles, selling high IV front month and buying back month. My simulations in TOS are giving me too good to be true estimates. I've been playing with buying more back month vs front to go from short to long gamma. These greeks I'm getting just seem to good to be true, long gamma, positive theta, delta neutral. The only risk I see is of back month volatility collapsing. What am I missing? Prices are based on buying at ask and selling at bid.
What am I missing here? (calender straddle)
- Thread starter baggerlord
- Start date
Your not missing anything, except adjusting may/June Ivol for what you expect it to be after Macys earnings on 5/11. You are buying extra June with a higher Vega risk. Also, you will likely not hold May until expiration, so you will never hit a home run with may. I like calendars, but I prefer to just do just calls or puts, not both and you need to pick the right strike, get enough vig between the may and june, and unwind it at the right time.
Good luck...
Good luck...
From the picture you attached it looks like bad price data for the front month. The call at 92% IV and the put at the same strike at 70% clearly one of the two has a wrong price.
Another thing, giving that M reports earnings there is an expected collapse in volatility. From a simple cumulative variance calculation the collapse is expected like this:
May 13, -52
Jun 24, -5
The fact that Jun17 is expected to collapse -26 vols, means that there is something fishy with pricing for Jun 24, IV is too low for that expiration.
I was wondering if it might be bad prices, although on TOS the other expirations are mid 30s IV as well. How do you calculate that expected IV drop? I haven't come across that in the books I am going through.
Well I found one thing I missed. I get that theta increases as you approach expiration, didn't realize how much gamma shifts at the same time, so my long gamma position quickly becomes short, which is what I want to avoid or at least mitigate. Good thing I have a stack of books to read still lol.