Calendar Collars

Discussion in 'Options' started by jones247, Dec 26, 2009.

  1. sonoma

    sonoma

    Spin,

    You'll have to take risk somewhere, so I'm not suggesting anything magical, but rather positioning your inventory to take advantage of the mean reversion of vol. Assume that your product is some big index and your inventory nets out to something that looks like a fly or a short straddle in the front month and some number of put and call backspreads in a deferred month(s). To take advantage of an increase in vol to add a position, assume that today the underlying falls and vol ramps. I would then look at your position and see whether your risk tolerance would accept a short vol trade. Might be in the front month if there's plenty of time to expiry, but if not, then in the next month out. Let's say you're 3 wks from expiry and spx drops 20 handles but vix ramps from 20 to 25. I'd look to add a short straddle in the front month. Not too many of them, because you don't want to outstrip the protection of the upside gamma in your put backspreads. The addition of the straddle is not a "special" trade because you're going to need those short contracts at sometime during the next few days or weeks anyway, since your book is perpetual. You're just taking advantage of the opportunity as it unfolded for you today. You don't want to add the backspreads on a day like this. You'll be looking to buy your long vega on a day that vol retreats.

    None of the above addresses looking at your delta risks. You've still got to play that as you would normally, either with options or the underlying.
     
    #31     Dec 30, 2009
  2. Spin...

    take a look at the synthetic equivalent of the calendar collar... i.e. reverse diagonal bear spread or reverse calendar...

    Walt
     
    #32     Dec 30, 2009
  3. spindr0

    spindr0

    sonoma,

    Thanks for the clarification. I get what your saying... tho not via volatility, I've built larger verticals, calendar strangles, etc. by incrementally adding to each side as price zig zagged.

    spin
     
    #33     Dec 30, 2009
  4. spindr0

    spindr0

    Walt,

    I'm familiar with them. I've used ratioed double calendar strangles and double reverse calendar straddles/strangles for earnings announcements where there was a month to month skew situation.

    spin
     
    #34     Dec 30, 2009
  5. sonoma

    sonoma

    spin,

    Exactly. Now just adapt your usual triggers to also consider vol.

    As you can tell, it's a stance that takes patience. One more point: there's some serious alpha to be had when you can catch vol making exaggerated moves, up or down, outside of its expected change for a given move in the underlying.
     
    #35     Dec 30, 2009
  6. Spin,

    I think that the collar can involve either the 620 or the 630. The risk characteristics are quite a bit different. Writing the 620 is much more conservative. Writing the 630 improves the upside quite a bit, but it is much harder to make a profit to the downside.

    Walt,
    the idea of using futures makes the potential returns dramatically higher using substantial leverage. Interesting idea, with potential. Frankly, this gives collars a chance to make much better money.

    A comment on the structure of the DBWB: I prefer a much wider version than your suggested arrangement. My suggestion--for SPX--using February expiry dates--

    On the put side> 1075/1060/1035
    On the call side> 1150/1165/1190

    The profit zone is pretty wide-- a bit below 1045 up to a bit above 1180.
    I realize the call side will be a bit tough to put on for much of a credit, but overall it should give a credit of about 5-7% on the initial margin. This is for 1.5 months. Even if the market doesn't move at all, it's still a decent profit! If I could make 5% 6 times a year with consistency, I'd be extremely happy with my returns.

    With the much wider spacing, and a 25:15 ratio, the downside risk is only 10 versus a potential gain of 15. A wider spacing means that if the market is moving slowly higher, like it is right now, the middle calls die faster than the close to the money call, leaving you with a positive value position. When you write it for a credit to start with, this means a nice profit. I'm also using some other tactics. When I get a chance with these, I do my best to roll the wider side up a strike or two to create some space between the credit spread and the debit spread side (thinking of the butterfly as two spreads). If the market is moving strongly, and then stalls out, you can wind up keeping a huge chunk of the debit spread side. The great thing about the DBWB is that there is a chance for a killer return every once in a while.

    I'm quite intrigued with the idea of using a OTM backspread to protect either the broken winged butterflies or straddles. It's pretty cheap (possibly even "free"), doesn't give huge margin issues (some, but not massive), and frankly gives good protection for sharp, black swan type moves. It also gives the possibility of selling the extra option to cover the costs should the opportunity present itself.
     
    #36     Dec 30, 2009
  7. spindr0

    spindr0

    Some people consider both horizontal time spreads and diagonal time spreads to be calendar spreads while others consider further differentiate them into calendars and diagonals. Now I see why I was disagreeing with your previous P&L projection (I consider a collar to be different stikes and that opinion may not be mainstream or universal).

    The risk characteristics of a reverse calendar (RC) and a reverse diagonal (RD) are quite a bit different. The RC is symmetrically V shaped whereas the RD is sorta obtusely L shaped.
     
    #37     Dec 31, 2009
  8. spindr0

    spindr0

    Thanks for posting your example. Does a 25:15 ratio mean 25 put and 15 call butterflies?

    If I could get a DWB for a credit with an extra kicker on either side, I'd be a lot happier with the
    risk profile. That would mean one extra long strangle on the outside wings, eg. 11/-20/10p and
    10/-20/11c. The extra strangle would go a long way into reducing pre-expiration risk. But I don't think it's feasible to get this for a credit w/o legging in.

    The DWBB is one of those strategies that will do well only if price and time line up (price is near a short strike at expiration). Unfortunately, they usually don't. Even if price gets near a short strike but there's a decent amount of time until expiration, it's still not going to be that profitable because the decay on the inner and middle strikes won't be significant.

    So in order to get somewhere, one is going to have to be proactive during the life of the position, or as you suggested, using other game tactics. My initial thought was that when the market moves, roll the more OTM short leg in a strike, maintaining the initial distance to strike and bringing in more premium.

    So in your example starting with a 1150/1165/1190 on the call side, if the SPX dropped 5-10 pts, roll the middle down, ending up with a 1150/1160/1190c butterfly. If it then reverses, double that amount, do the same on the put side. If this happens gradually over time, one can take advantage if the underlying cooperates in a zig zagging fashion.

    OTOH, with a drop in the underlying, one could add inexpensive kickers on the call side (my ratio idea from above) or add the backspreads that you mentioned.

    All of this is quite intriguing and opens up some different possibilities for a sort of stagnant market... which is what it is until it isn't :)
     
    #38     Dec 31, 2009
  9. If you can get the right prices, which is certainly feasible, combing an ITM with an OTM synthetic equivalent of the calendar collar seems to have BIG POTENTIAL, particularly if there's a 2 month gap between the front month and the back month!!

    Walt
     
    #39     Dec 31, 2009
  10. spindr0

    spindr0

    You'd have to provide an example of that for us to be on the same page but my guess is that if you use the same strikes but flip the ITM from put to call (or vice versa), you'll have the same risk profile and possibly have to deal with fewer commissions at expiration. Where a double diagonal (straight or reversed) gets interesting is just before earnings when skew wreaks havoc with the premium relationships.
     
    #40     Dec 31, 2009