ATRX calendar ratio backspread

Discussion in 'Options' started by AngusP, Feb 16, 2004.

  1. AngusP


    This is a papertrade that I'm putting up to be pulled to shreds by you guys, bearing in mind that I have primarily been a FTSE100 index short strangles/ratio call spread merchant, and with IV down at around 10 - 12 it has finally made me throw in the towel so far as selling index volatility is concerned. Also since 911 I no longer like the thought of naked puts. All part of the learning process! :)

    There would appear to be a calendar ratio backspread trade on ATRX. Sell 1 x Mar 25 call @ 3.0 - vol 67.6, buy 2 x May 30 call @ 1.4 - vol 47.7. Price based on Fridays close.

    Downside seems to be very limited unless IV for May implodes. Current IV for the >90 day calls is close to 2 year lows, and has only briefly dipped below 40 on one occasion in the last 2 years. Greatest risk would appear to be a gentle rise to around $30 which is resistance from Aug/Sept 2003.

    Comments anyone? Is this a reasonable trade or am I missing something important?
  2. The ATRX( illiquid options) mar 25 call seems to have traded a bit more than usual, so it got quite expensive on friday, trading volalitity 70.
    Somebody wanted that mar 25 call pretty bad, and the marketmakers seemed to have left the volatility at other strikes and months for what it is. Therefore I think the trade you suggest might be a very good trade... If you could still set up this trade...
    I was thinking about maybe even setting up the mar 25-30 spread, having a skew of more than 10% in the same month one strike away. selling 10 times the mar 25 and buying 13 or so 30 calls from the same month, hedging it deltaneutral with stock.
    Then in the month to come you might be able to turn around this trade with a small profit.
    You pay more in volatility for the mar 30 (58 versus 48 for may)
    But you have less vega risk. Though 48 doesnt seem so high implied for the stock.
    So conclusion I think selling the mar 25 at vola 70 is a good job, hedging it with mar 30, may 25,or may 30 , all seem to be good trades to me.