ITM Calendar Spread

Discussion in 'Options' started by Chesslamb, Oct 7, 2007.

  1. Chesslamb


    Watching a video recently concerning setting up a horizontal calendar spread the person on the video set up both ends of the spread in the money. As a newbie, I'm having a hard time understanding the why of that in regards to risk management. I know you do it because the delta move can increase the value so fast but it looks to me like the near end you sell would be in danger of immediately being exercised. Can someone help me understand why one would do that in light of the risk? Or is there something obvious I'm missing? Thanks.
  2. MTE


    An ITM call calendar is synthetically equivalent to an OTM put calendar and vice versa so there's no reason to use an ITM one, unless you can get a better fill on it, which is unlikely given that ITM options have wider bid-ask spreads.
  3. if there is no dividend involved your unlikely to be exercised early due to time premium remaining also if your trading european exercised index products they cannot be exercised early.
  4. If there's time premium remaining in the short leg, you're unlikely to be assigned early.

    Also, the ROC of delta is not going to be a factor to either side of the strike because you have offsetting positions.

    As mentioned by MTE, only a better fill would make the ITM calendar more desirable, and that's unlikely.
  5. Chesslamb


    Thanks to everyone for the replies. This helps.