What is the point of doing a Calendar Spread?

[Stymie]

Is there a graph where you can see the skews?

In reality, even if you have a graph which is an average across maturities, you wont see the one strike which has a spike on large volume/open interest because some hedge fund decided they want to own that strike/maturity.
It's tedious to look across the strikes and maturity to look for unusual bid/ask spreads but that is where the gold hides. It's not actually where the big volume is being done but usually where there is no volume and the market maker is willing to offer or bid the options. So you want the implied vols on the bid/ask.
As retail traders, we have the advantage of doing smaller size so the market makers bid/offer may be all we want to do via a hedge fund that needs to trade 1,000 contracts+. Where there is no volume, get your fill and don't go back to those clowns, just trade in the stock/product to unwind later. If you trade small so your not squeezed and the market goes in your favor, your position delta becomes too big for these guys anyways and they don't want to trade with you.

 

[ironchef]

Since we are not market makers, its not about shaving a nickel off a fair price, we need to find big aberrations and when you do find them, it's best to go out far and lock those in - when they are expensive - sell premium but there are also times when they are too cheap and you can make more money buying one year premium. When vols are big, it's hard to do spreads as you give up much of the premium on your long option so I tend to do naked options when the premiums give a big cushion. If I'm scared of a big move, then buy stock and do a ratio.

A follow up question:

Would going longer expose you to higher probability of a tail risk? Or it is statistically the same as shorter time frame, if I maintain the same delta in my trade?

Where there is no volume, get your fill and don't go back to those clowns, just trade in the stock/product to unwind later. If you trade small so your not squeezed and the market goes in your favor, your position delta becomes too big for these guys anyways and they don't want to trade with you.

Let's say I have an ITM call and want to unwind but MMs are only willing to buy for less than intrinsic (happened to me more than once), instead of selling the ITM call, I should just sell an equivalent number of underlying shares and wait? What do you do when delta of the call changes?

I really appreciate you taking the time to answer our questions.

Best wishes.

 

[Stymie]

A follow up question:

Would going longer expose you to higher probability of a tail risk? Or it is statistically the same as shorter time frame, if I maintain the same delta in my trade?

Let's say I have an ITM call and want to unwind but MMs are only willing to buy for less than intrinsic (happened to me more than once), instead of selling the ITM call, I should just sell an equivalent number of underlying shares and wait? What do you do when delta of the call changes?

I really appreciate you taking the time to answer our questions.

Best wishes.

Your risk goes up if you maintain a short position over the longer term which is why you only do it when they compensate you for that. The Delta will be higher on longer dates so your gamma risk is much smaller. This is not a normal strategy this is an opportunity that happens a few times a year and then you have to decide if it will continue to exist every month and if not, lock it in for one year. The premium is huge so not a hard choice when you see it.

I don't recommend trying to manage your deltas. The product will provide you the static Delta to effectively exercise your options into the underlying. The advantage of this is if you do get it right and there is a major reversal, once it moves through your strike you're making unlimited profits yet again by having the product.

 

[ironchef]

Your risk goes up if you maintain a short position over the longer term which is why you only do it when they compensate you for that. The Delta will be higher on longer dates so your gamma risk is much smaller. This is not a normal strategy this is an opportunity that happens a few times a year and then you have to decide if it will continue to exist every month and if not, lock it in for one year. The premium is huge so not a hard choice when you see it.

I don't recommend trying to manage your deltas. The product will provide you the static Delta to effectively exercise your options into the underlying. The advantage of this is if you do get it right and there is a major reversal, once it moves through your strike you're making unlimited profits yet again by having the product.

Thanks.

Happy new year to you.

 

[RGLD]

Your risk goes up if you maintain a short position over the longer term which is why you only do it when they compensate you for that. The Delta will be higher on longer dates so your gamma risk is much smaller. This is not a normal strategy this is an opportunity that happens a few times a year and then you have to decide if it will continue to exist every month and if not, lock it in for one year. The premium is huge so not a hard choice when you see it.

I don't recommend trying to manage your deltas. The product will provide you the static Delta to effectively exercise your options into the underlying. The advantage of this is if you do get it right and there is a major reversal, once it moves through your strike you're making unlimited profits yet again by having the product.

My general approach to calendars are legging in. I would sell the option first, than wait for it to move in my direction a few percent. Than i buy massively in thr future same strike or 1 strike lower options.

If the stock doesn't go in my direction i would just treat it as single position where i roll over or cut loss.

This is probably not the best way to use calendars but please give me your thoughts.

Keep in mind i do pay attention to vol as the later option always has multiple earnings dates.

 

[Stymie]

This is an interesting approach and I have had some luck doing them. I guess you have to look at the risk vs reward. What happens with a single option payoff vs the calendar and when you put them on. The key to all of these strategies is to make sure you are locking in higher gains than losses. You don't want to use the calendar as a crutch to help you sleep at night as that just locks in losses and takes away chances to win. A poker analogy would be to fold which limits any chance of winning the hand vs putting in a token bet relative to large pot and hitting into your straight. The other way is to think about probability of profit vs loss and making sure over time you are making money and not wiped out by single large losses.

Where I have had trouble is doing short dated options premium selling and getting hit with the high gamma. That is when you try to leg into the other side and get killed. The option prices can move so fast that you have no chance to get filled until its too late.
The result has been doing the opposite strategy of buying an option first and then selling an option into higher vols. Then you can embrace the higher vol moves regardless of outcome - you either limit loss when it goes against you or your delta goes higher when your right and you make money at a faster rate the more you are right. It all comes back to same goal - make money by end of year.