I have an educational video on Double Calendar Spreads that starts the position with a PUT spread below the money and a CALL spread above the money. 1. Is it true that the PUT calendar spread and CALL calendar spread has the same risk/reward cruve. Even if they are above the money or below the money? 2. Would it be better to just use CALL spreads since they would be less likely to be exercised early than PUT spreads? I plan to trade these on the QQQ and IWM.
One thing's for certain, do not use calendar spreads during earnings with front (and the one after) expiration at abnormally high IV. It normally doesn't work well unless you're not expecting a large movement. OTM calendars have different risk reward characteristics in terms of where the strikes are. If you think by a certain expiration the underlying's gonna move to a certain price level bias your strikes accordingly. Just make sure the back expiration vol isn't gonna drop a lot... or it'll not look pretty.
If someone exercises a PUT they get money, if someone exercises a CALL they get shares. Sometimes an investor may be in need of cash so they erecise there PUTs. At least that's what I read once.
There are some videos on YouTube where the guy uses nothing but CALL spreads for his double calendars. Why would he just use CALL spreads?
I went back and found the video. I followed the author's link to more videos and he showed one in practice. He started with a single calendar and then later made an adjustment turning it into a double calendar. When he was made the adjustment he checked the prices of both the PUT and CALL spreads and since the CALL spread was cheaper he bought it. When he did that he stating that the CALL and PUT spreads were interchangeable.
Exercising a US single-name results in a short stock position. In OTC vol-markets a 25D "risk-reversal" (and 2-vol fly) is quoted (100ths) to reflect the volatility skew. There are also some issues with symmetry. IOW, vol and forward vol is never flat, so the payoffs will never be truly equivalent, and may be quite distinct.
Do not rely on that video. Same-strike call and put calendars are equivalent. There are some fwd exposures, but it's not for this thread. OTM call and OTM put calendars NOT =. Same-strike call and put calendars are =.
http://www.youtube.com/watch?v=O1etXvU-5gk&list=UUXx4UxmEFWtaFYBNict0j3w&index=3&feature=plcp http://www.youtube.com/watch?v=PERXc1Pa1wk&list=UUXx4UxmEFWtaFYBNict0j3w&index=1&feature=plcp http://www.youtube.com/watch?v=SqlbPaeIZ6s&list=UUXx4UxmEFWtaFYBNict0j3w&index=2&feature=plcp