LOL I looked at the P&L graph after I wrote the post and figured out potential problems with the position. Shouda done that first. Thanks.
H John, Thanks for your reply. Yes, I tried to neutralize everything, but it just doesn't work. So looking at the strategy you posted, you're short the back month stangle and long the front month further OTM strangles. (If you have to make them credit and debit spreads because of margin requirements, that's a lot of positions! Are there brokers that will recognize the reverse calendar spread as a covered strategy?) What would be the advantage and disadvantage over a regular IC? Thanks.
There's more than a few moving parts in these unbalanced double calendars/diagonals. While it's a good mental exercise to try and figure out the greeks, you'll find a good P/L (risk) model is your best friend. A good ability in forecasting IV collapse and decent execution also will help. lol! If you like earnings/event plays and want to reduce the number of legs, take a look at long straddles/straddles going into earnings. There was a guy on another message board (YHOO) who brought this trade idea to that board's attention. Essentially, he would buy the straddle/strangle 3 - 4 wks out before the event, anticipating the IV expansion to overcome theta. He would make delta adjustments along the way --- sometimes even changing strikes. I could never get a handle on his adjustment strategy so I can't give you much more than the above. Tried the trade a few times with very limited success.
No broker would recognize a reverse calendar as a covered strategy, cause it's not. The main difference between the regular IC and a calendar version is that with the latter you add another dimension, namely the intermonth volatility.
Heh, that's true. There's no way to know or completely contain the risk of the back month option with the front ones. Okay, that's what I thought. Thanks!
Yeh. The ET counter was out of corned beef so I went with a tongue sandwich. Again, you nailed it. It's a balancing act to find a comfortable blend of short versus long, ending up with an acceptable risk/reward ratio. Too much of one leg and you have good protection but little profit and vice versa if you have too much of another leg.
Ditto. I never got a handle on that one either. I suppose that it was because it was forward looking rather than the day before earnings when all numbers are right there in front of us. Oh well, another one for the to do/figure out list.
Yep, gamma scalp along the way to mitigate the time decay and hopeflly, catch some pre earnings IV expansion. My take on it was that if the 2nd month was utilized, one might also be in a position just before earnings to set up a double calendar strangle or straddle with these long lower cost 2nd month options andshort the near month fat IV options. Yeh, yeh, I know... see my to do list.
I understand the idea, but I have to look more into the implementation of gamma scalping, like neutralizing at 1 SD? I've done a search here, but I didn't find specifics or journals focusing on gamma scalping.