Spindr0, I appreciate this exercise, however Im not sure I know how to go about calculating this manually..... What I can gather from the above info is with a 1:1 ratio, the near month would return a profit of 20 cents (.65 -> .45) and the far mnth would return a loss of 5 cents(.50 -> .45) I do understand the importance of modelling it. Its just Ive always used the software, never manually....
You don't want to do this manually. Calculate your theoretical values. In your software, start off with a +10/-10/-10/+10 double whatever. As per previous example, you're shorting 10 each leg of the near month 50/55 strangle and buying 10 each leg of the next month 50/55 strangle. Since we were talking about selling fewer of the near month, drop it to +10/-9/-9/+10 or perhaps +10/-9/-8/+10 or perhaps +10/-8/-8/+10 etc. When you find a risk graph that is balanced (assuming you don't have an up or down bias) and has a good risk reward ratio, you have a candidate. Then it's just a question of how many units you want to do and getting a good fill. Oh yeh, a cooperative underlying post EA sorta helps. If you don't have software that can graph the composite position, it's an exercise in futility.
Probably shouldn't get in the middle of this but the poster asking the question was talking about CRBs (calendar ratioed backspreads). I think you're looking at double RC's. I think the 15 bps differential for CRBs doesn't work. In fact, I haven't found anything yet that remotely works for CRBs.
Hey Beb. A number of things have been discussed in this chain, so it's hard to know what I'm talking about (g). But now, I'm not talking about double RC's. The point of this example/exercise was to get him to play with his software rather than asking tons of questions which could be more readily answered by a quick look at a risk graph. As you well know, it takes a bit of tinkering to find an acceptable combination. And whether any of it is acceptable to him can't be known until he sees the possibilities...
Spindr0, dont think I can set up something like that on OptionVue, I will try and find some actual scenarios that match though. I am actually spending a fair bit of time modeling these and running them on actual past EA's as well. Im still trying to figure out how to run what-if's with different IV's for each month though. The questions try and help me understand the logic behind it all. Once I find myself a couple of examples that work, Im sure it'll all make sense though. Once again though, the help here is much appreciated.
Yep, examples that work become light bulb moments. Yep, you're welcome. And for the answer to the assignment, try a +10/-7/-8/+10 ratio. That would amuse me