here's whats confusing and bewildering about calendar spreads. 1) in calendar spreads, long rear month, short front month is net long vegas. likewise you are short theta. (you gain as time decay occurs, and lose if IV drops). 2) opposite: short rear month, long front, is usually short vegas and long theta. (you lose quickly to time decay and supposedly gain quickly if IV drops) spreads. Answer probably lies here. Whats so fascinating is that in #1, despite being long volatility, you lose the most if you get a big move. Performs similar to being short a straddle. And in #2, you gain the most if you get a big move away from your strike (your NTRI example), despite being short vega. Performs like being long a straddle. But as evidenced in the failure of my 50/50 NTRI (short rear, long front), IV drop does NOT help this position since you need to finish away from the strike. Interestingly enough, #1 performs similarly to long butterfly spreads and short straddles (different risk/reward ratios of course) despite being a long vega strategy... ... Now to review impact of delta and gamma on calendar ... an as to my BIDU position, I'm essentially straddling for March right now ... but won't keep this position on for long. In the end, BIDU wasn't much of a loss though, since I was able to close those short puts at the best part of the day Thursday. If I can get some movement next week on BIDU, I'll do nicely. Need 3 pts up or 6 pts down to breakeven here. Both are extremely likely.
I agree with your points, but I think the issue is with the way risk/reward is changed during earnings. In #2, even if it is a short vega position (in your calculator), you might lose money from IV crush because front month is inflated and I think vega is not accurate.
This is a great article that argues between the two: http://investopedia.com/university/optionspreadstrategies/optionspreads5.asp But the point remains, the horizontal calendar spread can be a very directional trade, considering any big move away from your strikes (or way past your strikes) will turn the spread profitable, regardless of normal IV crushes that occur after earnings. The key on success of these spreads is a good distance from your sales strike (which reiterates their directional nature). If it was a pure volatility trade to profit solely on the drop of IV, then the trade would be successful if NTRI was 45 after the sale of those 45/45s, which it wasn't. Perhaps combining the two might be perfect: selling strangles on front month (high IV month), buying strangles on back month (lower IV). even though you are long vega, the short theta and directional probability of the trade could work very well. I need to model that strategy.... Here's an interesting trade I'm considering for March.. Tell me what you think. I know it fights decay theta, and is -vega (when AAPL is way historically low on IV), but I think that risk is completely offset by the stock price potential at expiration of this spread. 1. 1x Short 75 apr put, 1x long mar 75 put 2. 1x short 80 apr put, 1x long mar 80 put 3. 1x short 85 apr put, 1x long mar 85 put 4. 3x short 100 apr call, 3x long mar 95 call Take a look at options premiums, but this trade is even profitable if aapl expires at 80 (worst spot for the put spread group?) for March, considering IVs will march up at end of month for Apr earnings. At an 80 expiration for March with inflated IVs, losses on the put spread side will be paid for by gains from the #4 (call spread side). But if AAPL ended Mar at 90 or 100, those puts would be very profitable, and the same would be true even of the call spread (especially with a close above 97.50). I avoided the 100/100 and opted for the 95/100 since the premium on Mar 95s is so little, at it offsets the upside risk on the spread [and even gives some extra profit on a wild upside move]. This may be the perfect spread to finance the buying of some 85 AAPL calls, as well.
You are looking at March expiration right? This trade is not profitable at $95. Or at $85 in fact, especially if IV goes up. What is your bias about AAPL until March? What are you expecting/ not expecting?
In second thought, having long 85 calls in some configuration may entirely offset short vega risk here... the question is -- what is best configuration... maybe outright mar 85s.. or outright apr 85s.. or 85/-95 apr spreads ?
and/or maybe beef up on the put spreads at 75 and 80 to flatten the profit side of low probability low price (75 and below) side of the curve at the expense of raising the rest of the curve. ... How to make money with zero risk; thats the question. when you get a beautiful curve that isn't vulnerable to anything, then lever it up.
Here is a simulation one week before expiration, and one with IV +30%. Not a good trade, if you ask me, especially if you expect volatility to increase. Anyway, if I can be brutally honest, these kind of spreads have very lillte advantages in this kind of situation. It is not because it is more complicated that it will be profitable. More importantly, there is no free lunch with options, so don't try to get a sure profit with no risk, you won't find it. I personnaly like using spreads for situations where I expect some extreme movement and where I can't control my risk (earnings etc..). If you are bullish on AAPL, just buy some calls, or sell some naked puts. Thinking that spreads limit your risk is a fallacy. The best way to limit your risk is with position sizing and stops. If you are really afraid about overnight risk (and you should not if you have adequate size), use a calendar if you really have to. But you will only reduce the risk to a certain point. Nothing you could not do with just reducing size. And with naked calls/leaps, you don't limit your profit. And your commissions/spillage costs are lower. The only spreads I would use for medium term investing are strangles and credit ratio spreads. Anything more complicated can be achieved in another way.
Got my hands on the thinkorswim paper trader (I use IB) ... nice demo. Anyway, I agree here. Although on a more simplistic level going long these calendar spreads (reverse) may be a good trade instead. Flip that graph over and pump up the IVs and profit chance is pretty high.
Here's a decent spread up your alley. CRM (I am short anyway), long Mar 55 call, short May 55 call. earnings is tuesday night I think, and my angle is that this is an overinflated POS priced to perfection. should be 30 at most, not 50!! The highest line is a reasonable IV target for the spread. I short this every earnings season ... this time is the ripest of all opportunities it seems. Should profit nicely from the IV crush.
The Mar 50 May 50 models even better. the combination of both results in a beautiful curve for IV collapse.