Registered: Dec 2005
03-20-12 04:32 AM
Quote from rallymode:
Nice trade but I wouldn't call it 'almost no risk'. I ve been burnt many many times trying to pick a top in the front fly this close to expiry. Pull up 3 or 4 year data and you ll see what I mean. It's a crap shoot IMO unless u ratio it. Don't forget to let us know when u short it next cycle
Under most conditions I agree, which is why I usually don't trade it within two weeks of expiry. But go ahead and go back 3-4 years and show me a single instance where the front month switch was trading at $5.60 two days before expiry. August 2010 came close, and as expected also crashed intraday heading into expiry. The probability of it holding above $5.00 intraday was extremely low (<5%).
Then, as others pointed out, there was significant edge in the long APR/MAY. So if both trades have significant edge alone, and together they help to hedge against the unexpected move, you end up with a position that provides significant profit potential and extremely low prob of loss. But you've gotta be on it all day, because it is very much a crap shoot EOD. You gotta set a profit target and when it hits on an intraday move, you gotta take it.