Calendar Spread vs Bull Spread

Discussion in 'Options' started by kperrin, Nov 30, 2008.

  1. kperrin


    I understand a calendar spread: same strike with different expiry. I understand a bull spread: same expiry with different strikes. Why wouldn't I combine the two? Why wouldn't I, for instance, buy the GLD January 80 and sell the GLD December 85? in a ratio to produce a delta neutral situation?
  2. MTE


    It's called a diagonal spread and there's nothing wrong with it.
  3. kperrin,

    Yes you can do that, however, remember that delta neutral doesn't mean "can't lose". The delta of the position can start to change quickly with a price movement and losses can build up if that happens.

    I entered a simulated position into the Position Simulator at using a stock price of 80 and IV of 40 and buying 4 of the Jan 80s and selling either 7 or 8 of the Jan 85s and while there can be profit in a middle range of say 77-88 or so, there can be fairly large losses if GLD falls below 75 or goes over 90 (which certainly makes sense since you are selling more of the 85s then buying of the 80s).

    Before you put on a trade like the one mentioned in your post, you should model it to see what would happen at different values and at different times to expiration.

    Also always keep in mind that delta can change quickly so a trade that started delta neurtral doesn't neccessarily stay that way. An easy way to realize this is to think of a straddle - when a delta neutral straddle is placed, usually the call delta is about .5 and the put delta is around -.5, but if the stock moves way up, the delta on the Calls goes near 1 and the put goes near 0. So now the straddle isn't even close to delta neutral.

  4. Keep in ind that many brokers do not allow you to sell 'extra' options. As an options rookies, I suggest avoiding a position with naked short options. At least until you gain more experience.

    If the term 'never' is ever applicable to options trading, 'never be naked short' is an appropriate place to use the word.