OK I'm a newby. Let's start with that. My question is: If options premiums are high by Black-Scholes standards (see GLD for virtually any strike or expiry) do I really care if I'm putting on a calendar spread since both legs of the spread are high. If I'm "overpaying" for the Call is the buyer of the Put not also "overpaying"?
You don't really care about high premiums per se, but high premiums mean high implied volatility and in a long vega position a volatility drop would hurt you. Btw, Black-Scholes requires a volatility input to price options so you can't really say that premiums are high by Black-Scholes standards. There's no standard. All you can do is say that you think that the implied volatility is high compared to historical implied volatility, statistical volatility or both.
Thanks. When I say "by Black-Scholes standards" I am referring to the fact that E*Trade calculates a "theoretical value" on their options analysis page. I admit I don't really know how they calculate this number, but I assume it is based on actual or historical volatility.
kperrin, In the example of GLD you are using, this might not apply so much, but sometimes a certain month might be judged as "overpriced" because of an event such as an earnings release that is coming. So it is good to know the relative price of what you are buying and what you are selling. As far as the Etrade calculator, you would do good to figure what the prices should be on your own. Larry McMillian each week updates options volatility data that you can get here: http://www.optionstrategist.com/free/analysis/data/index.html It shows that for GLD, the IV is around 46, while it's HV measured at different times is between 42-47. You could enter the IV along with the days remaining, etc. into a B-S calculator and come up with the "fair" price. You can find some calculators at www.888options.com. Look in the menu for "Trading Tools" -> "Pricing Calculators". I don't know if ETrade does this or not, but optionsXpress, which I use shows the current IV for each actual option in the chain, not just the general IV for the stock. I think that's a nice feature to have. JJacksET4
Your concern isn't what happens to the put side but how much you over/under pay for the calendar. The higher the IV (implied volatility), the more the calendar costs. If IV contracts, you will incur a loss just from that.. OTOH, if you are doing a reverse calendar, that is exactly what you are looking for.
Jjacks, FWIW, OptionsXpress averages the B & A for IV calculation. If you're attempting anything clever like IV plays on earnings announcements, you have to BS it yourself. But for a quick down and dirty look at IV (for example, skew), it's good as a starting pont.