TOS Thinkorswim does show the margin required for the short calenders under the analyze section so I assume they do allow them and they show the spread value in the order section. I can't see a spread value as such in IB so maybe they don't allow them or you have to leg in.
Mav, Thank you again for the detailed explanation. let`s make MRVL - high volatility (one of the top on IVolatility list) on Tuesday had third quarter fiscal results released on Wednesday. Following are quotes (bid/ask) on Tuesday close: Call Nov40 - 275/295 Put Nov40 - 40/55 Call May40 - 730/770 Put May40 - 370/400 And quotes on Wednesday close: Call Nov40 - 260/285 Put Nov40 - 65/80 Call May40 - 720/760 Put May40 - 390/420 So opening short calendar straddle on Tue would be $750 credit and closing on Wed comes to -$850 debit resulting in $100 (1 point) loss. But once profits in this strategy are about fraction of the point, reward/risk ratio would not look impressive ?
Chris, A couple of things here. One, what did the stock do after they reported. Two, a one point loss is not that bad and the reward is not a qtr of a point. I have made over 4 to 6 pts in these trades and higher. I said most of the gains and losses would be small which is why I said you need to do a lot of them. Many of the gains will only be for 1/4 or 1/2 pt. And most of the losses will be for 1/4 to 1 point. But if you do enough of them the risk to reward ratio is very attractive. Also do you know how much the vol came in with mrvl? By the way, the prices you used were taken off the bids and offers which is fine but I always leg into these and get at least a nickel if not a dime off the bids and offers. So that already drops the loss to only .60 vs a dollar.
Mav, I can see that your have mastered your technique through the time. So the devil is in details. I don`t know exactly how come mrvl vol went up so much, so there might be some other event the public is waiting for. Also - have you ever tried to trade this in longer time perspective ? The same mechanism should work for high vola stocks, even if vola does not implode in one day, but slowly going down. At least I think so. About taking off bids and offers - what do you do if the market moves during trading ? These are ATMsm so deltas are high. And if you trade so many of them probability of such scenario is quite high, isn`t it ?
Thanks a lot to Mav and Hello Dollars for posting here. I called around to some brokerages and it looks like only Green Tree Trading allows spread margins for short back month/long front month. Are there any other ideas on how to play volatility implosion in the back months? Is putting a vertical spread on in the back month such a play? Should we do some sort of covered write?
You could do a synthetic naked call which would be short stock and short a put. I believe your margin would be the same as it would be for any short stock position and since your naked put is covered by the short stock you should be ok on that end. That would be a way to sell really high premium on the puts. However you would need to have a bearish bias on this play.
If you were to put on vertical spreads on puts and calls in the back month, expecting a volatility implosion, does that remove directionality? And is this being short a straddle in the back month? Any opinions on this strategy? It does avoid the whole margin issue.