You could create a bearish OTM put calendar by: - lodging stock - selling ITM Call for front month - buying OTM Put for back month Stock + Short Call = Short Put. The only condition is that credit for Call >= debit for Put. James
How does that create a calendar spread? Its P&L is more like a synthetic short stock (not equivalent but similar)
[Long Stock + Short Call front month] = Short Put front month [Stock + Short Call front month] + Long Put back month = Short Put front month + Long Put Back Month = Long Put Calendar
At the moment I enjoy trading credit call, credit put, iron condors, iron flys and credit diagonal spreads. I just wanted to expand the amount of spreads that were available for me to trade.
Thanks for the expanded explanation, shorting stock in my account isn't practical so I'll just have to go busking on the street to build up some free cash reserves
As I understand it, he has stocks in his account and wants to use that for margining (aka lodging) a calendar spread on another stock. So you need to take the long stock out of your equation. If the stock in the account was being used with its own options, what you have suggested would be a diagonal since the strikes are different.
Who mentioned different strikes? I assumed as we were talking calenders, it would be implicit that these would be same strike, different month spreads. James
I understand, although you should consider a less complicated alternative to express your market opinion. If you can trade an iron fly given your brokerage restrictions, then I think you don't need to feel disadvantaged because you can't buy a calendar straight out. Consider that the fly positioned at the relevant strike of the calendar is nearly the same trade as the calendar. Maybe even a better trade. You can express a neutral bias, you can position it OTM for a delta move, you're benefiting from time passage, and the risk is limited. The big advantage is that you don't have to worry about the vol differential during the trade. And don't get drawn into arguments about the differences in vega, as if that difference is material. Sure, that feature is different between the two trades, but excepting some unusual circumstances, it's hard to get that advantage to show up at the party. Of course your experience, the underlying, etc, will play into this, but for the most part, trying to anticipate vol changes in different expiration series to optimize your p/l is a challenge. If you're trading a front month calendar, a position that resembles a fly in the front month will almost always get you what you want with less hassle. The fly can be transaction-intensive, but depending on your choice of a back month for the calendar, even this apparent disadvantage of the fly might not really be so when you try and put the trade on.