its a 1 by 2 in the same series....... selll a close to the money call and buy 3 otm calls as an example..... any ratio of selling less closer to the money then the otms you buy... commodities etfs are for the birds
Hi cdcaveman, Much thanks for the quick response! I have a basic understanding of what a ratio backspread is as it relates purely to options (I hope!). What I'm unfamiliar with is how you could use it to reduce rollover cost/risk in futures. Say for example, I think Crude Oil is going up in the next 1-3 months, exactly when, I don't know. Now, I can buy CL Dec'12 @ 86.18. CL Jan'13 is @ 86.72 and CL Feb'13 is @ 87.30, both presenting a contango risk if I have to hold further than the front month. So, how would I use a ratio backspread to mitigate the rollover cost? Appreciate your help on this. -Nick
You really can't - without taking on some other form of risk. If it were possible, then you can construct an arbitrage trade where you can capture the roll yield without being exposed to price risk.
Delta drift.....The skew lays down as time passes putting harm on the ratio.. Making the farther otm options lose faster then the closer to the monies...thats one risk... Next is delta.... If you slowly approach the short strike it hurts and you lose delta quick....but other then outright premium its a goood outright long volatility play.... so if your short vega in the front month with flys... And long wing risk throug ratios in the back you can manage your hortizontal vega risk or Time vega....... I dont do this... But ive read and studied it a little and it seems right... of course your getting very neutral...........gotta limit blow out risk in the calender..front month vol can increase alot faster then back month....
I take what i said about skew back... skew increases as time passes.and there is no way to make roll cost with out price risk like cta said
If you want to buy and hold corn, just trade the DEC contract. You can get in and out 365 days a year. Roll out once a year.
i would strongly suggest NOT doing this - commodities have upside tail risk as opposed to downside for equities - if you were short corn calls during the late 80's - esp the "drought of 1988" you put the suicide hotline on speed dial can you imagine being short calls and price going locked limit up for days on end?