Calendar backspread

What pin risk?

 

I don't understand the vega being wacky comment. The trade is fixed loss.

How does vega get wacky that would make this structure a general bad idea?

 

I think he's referring to the term-structure.

 

Wake up people -so you'd close out before expiry-and let's say your front month short is trading at 80% vol,andf your longs at 40%? -do the maths-you have to understand that one month bears no relation to the next,and if it's a stock,you could get the stock put to you yadda yadda- use iVolatility.com's calculator and have a play with the volatility and vega, and be assured that vega is utterly unreliable

 

You have no idea what you're talking about... it's the term structure.

lol now tell us about the pin-risk in the position, please.

 

It's best to time the backs to an event; earnings for example. You're not going to have any risk to term-structure in that case. The caveat is that you're going to pay a premium for the backs in vola. Most vola will continue to ramp (synthetic time) as participants will assign a dollar-move to the event, regardless of the vol-line.

You need to stress the thing at flat vol on both series at expiration of the front. Avoid you don't like the area under the PNL curve at flat-vol with price at the long strike.

 

Here's a 2x diagonal backspread into earnings on GOOG at front-month off. 575/580C 1x2. It earns above the short strike and all all points above. Downside BE at 572. This assumes 800bp on vol over the Oct10 exp. You're not going to concern yourself with Oct10 vol, it's simply not an issue. A 17 figure on Monday becomes a 19 figure on Tuesday (fixed prem). The guys that bitch that there is "vega" risk on the fronts simply are clueless. The risk is to term structure. What's the vega risk in Oct10 when the shares are at 582? None, it's an 85D. How about 560? None, the thing is trading at $0.50 and you're all delta and blown-out due to the Oct17 two lot.

The risk is in the backs. You mitigate that risk by timing the backs into reports. Or a strip of calendars (don't). Entirely different play if you're trading a "normal" term structure (A/B >1). I'll show an example outside of the earnings cycle.

 

good luck Convexx you have no idea do you?

 

Uh oh.

 

yup. Now tell us about the pin risk.

Assigned? Then you're long the synthetic straddle. Do you think there is assignment risk in that GOOG trade?

Now tell us about the pin risk.