I'm investigating calendars and diagonals. So I'm at the point of watching prices. I have a mildly bullish bias on CEPH this morning, so I give it a look. I build a call calendar spread with a strike price @ 80. (Bullish calendar). And then for grins, I looked at a put calendar spread to see the price difference, because they're equivalent, correct? I see a pretty significant price difference. Let's say for grins, I can get filled at the mid. The price of the call calendar is .75 and the put calendar is .50. I've attached a screen shot to help someone help me figure out where I'm going wrong. I know I've asked this question about vertical spreads, but the spread difference was usually a nickel. This seems much more substantial. Thank you.
One is way ITM and one is OTM. IV skews, changes in b/a spreads for ITM v. OTM and time value premiums can affect the cost of both. They are equivalent in theory but actually pricing may vary taking into consideration these factors.
Thanks coach. So I guess my question is really, can I "take advantage" of this mispricing, or am I somehow assuming risk somewhere that isn't obvious? In other words, is the put calendar cheaper for a reason? I understand assignment could be an issue.
how can a calendar spread be bullish or bearish? I always thought they were neutral. Any insight here? thanks
A calendar can have a directional bias based on where you select the strike. Assume XYZ @ $50. A FEB/JAN $50 Calendar would be neutral expecting the stock to stay sideways by JAN expiration. An OTM Call Calendar using FEB/JAN $60 strike would want the stock to be at $60 by JAN expiration. This is a bullish calendar since the stock is at $50 right now. So you can give a calendar directional bias depending on whether you choose ITM, OTM or ATM strikes.