Hi ALL, I wanted to hear from people on this forum all pros and cons about Calendar Backspread ratio. For example, stock trading at 83 - selling short current month call at 85 strike for .80 and buying 2 next month calls at 90 strike for .40 or ratio can be 2:3, 2:4, what are pros and cons on such play? Thank you all in advance.
Your actually doing a diagonal backspread (vertical/horizontal). do you mind telling us what the stock is? or the Greeks? My understanding of backspreads is that you anticipate a rapid movement in the stock. You want the stock to be stable until the front month is past then to take off. Unless this is a fairly volatile stock (over 50 IV) you may not get the movement you need for a decent profit. edit. and I have no personal experience in doing backspreads as the past few years with IV's so low they didn't have a very good probability of profit. Hopefully someone who does/likes them will weigh in.
It's difficult to answer the pros and cons of the strategy without additional context. You have a diagonalized backspread. It will be long a lot of vega. More thoughts on what you forecast for your stock and rationale for looking at this particular trade might encourage others to lend their thoughts. Good luck. MoMoney.
As mo has said, your primary risk is not short gamma, it's long vega. Overall the pos is net +gamma otherwise you'd have a diagonal. If the sold 85 call covers the cost of the 2 bought 90s, then you have no downside, if not you will be short deltas at a point and lose money.
Short position should offset long position so trade will be in credit or nothing (except commissions). Target is wait until short options will expire and sell long options in profit. Add to the edge to work with IV skews as much as possible, even without looking at a chart. I am just don't know how is assignment working in this case and is this type of trade require margin? Would it be enough to monitor position daily and get out from the position before market close if my short position get in ITM? Thank you.