option spread question

Discussion in 'Options' started by dolbo, Sep 7, 2012.

  1. dolbo


    Hi guys,

    I am paper trading and experimenting with various spreads.

    I tried this diagonal spread:

    Long Dec 660 call filled at 52.30
    Short Nov 665 call filled at 43.35

    Here is the calculated theoretical result using these values:


    According to which the initial balance should be positive.

    But in reality the long call is at 0.10% gain (Current bid is 52.15 and ask is 52.55)

    And the short call is at -0.88% loss (current bid is 43.55 and ask is 43.90)

    So the total loss is about 0.78%.

    Could you explain this? Did I do something wrong?
  2. 1245


    Can you ask the question in another way? I don't understand anything after the description of the trade your asking about.
  3. dolbo


    OK, please disregard all the numbers. Let me ask a simple question.

    If I expect AAPL to stay within 630 and 720 until end of November,
    would this be a profitable trade (diagonal spread)?

    Long Dec12 660 at 52.30
    Short Nov12 665 at 43.35

    Just making sure I didn't mess up in general, such as a wrong direction, buy vs sell, etc.

    A few hours after order was filled, I am about 3.6% down on this trade. Is this because of the bid/ask spread multiplied by leverage? Or due to change in volatility?

    Calculator is showing different daily results (no initial "red") so I was wondering how much off I could end up due to differences between calculated and real data.

    Should I even use this calculator when planning real trades, or I could be in for a big surprise?

    I hope I am not asking anything stupid here. And yes I know the most popular answer to questions like this: stay away from options. Which is why I am paper trading and hoping for answers. Thank you.
  4. 1245


    this spread has max profit with AAPL at or near 665 at NOV expiration. The Novembers expire and you still own the Decembers. If you expect AAPL to stay with in the 630/720 range by Nov expiration, sell iron condor using the Nov 630 Puts and Nov 730 calls.
    Buy Nov 610 Puts, Sell Nov 630 Puts
    Buy Nov 750 Calls, sell Nov 730 Calls

    Your spread also has risk from the time spread skew. Use all November to max profit with your opinion. Selling premium is a more direct way of meeting your expectation than a calendar vertical spread.
  5. dolbo


    Yes. I noticed this spread looks sort of direction neutral, it allows quite a bit of room both up and down to stay profitable.
    I thought that diagonal spreads are directional.

    This one is perhaps slightly bearish. Yes, max profit is at 665 but it is insanely high, like 185%. So I thought this trade could be closed well before that if AAPL is far from 665.

    Yes. Is this good or bad? I would close both way before the end of November.

    Thanks, I will try to run this in the calculator.

    What do you mean by time spread skew? Volatility skew between the two legs?

    You are saying, you would suggest to keep these two positions until the end of November?

    Do you mean selling naked calls? I thought these spreads could be also thought of as selling premium only in a safer way? Not sure if this makes sense.

    Thanks a lot for your reply
  6. 1245


    apple's earnings will likely be after October expiration. That means the Nov options will be front month for earnings and will likely be a higher IV than December right up to earnings. Then,you would be short nov options for the earnings move, which in my view can average 6%. after the earnings, both december and nov vol will be much lower.

    Take it from someone that has traded AAPL since summer 1985. Placing a value this early on any calendar near earnings is very tough. Even harder without knowing the exact day of earnings. The skew between the months will be much different if earning are before oct expiration, which they are sometimes.

    At least if you have a opinion and stick to one month, you are only betting on that , and not the calendar values.

    You can sell premium protected or unprotected. I think retail accounts should always do spreads rather then sell naked options unless you truly understand margin and risk.
  7. 1245


    In my opinion, with options, always start with an expectation. You believe the stock will stay in a range. Then pick the best strategy to allocate assets toward that idea that takes into account your risk tolerance and current market pricing. Your spread sounded like you choose it for other reasons that don't match your expectations.

    Good luck....I hope I made my self clear. Typing on my iPad sucks.
  8. if i remember correctly .. the margin requirements on a calender spread like that are basically that of a short call.. and a long call... and the short call isn't covered by the long call because they aren't in the same series.. i'm almost positive its that way.. cause i've shorted and went long calenders... that being the case.. that makes it a no brainer.. on a small account.. i'd be putting flys on ... spreading across earnings months is a whole nother trade against the rise in vol related to earnings in itself... if you range trading.. id personally stay away from THAT!... if you wanna trade vol into earnings thats another conversation in itself.. ...

    i am not a apple fanatic.. i own none of their stuff... i build my own computers.. i have a google nexus phone.. but i think aapl is a great momentum name with alot of following ... plus its got fundimental substance behind it..

    my thoughts againt are.. i'd bull put spread for credits .. or put flys on it... i'd stay away from call credit spreads.. as i think the Iphone 5 is just to much tide to fight up..

    and to be even more frank... straight up stabbing at a few otm calls with money you can straight lose pays hugh sometimes when its been quiet for a while and it starts moving.. and when i say big.. i mean .50 cents to 10 bucks big.. and bigger then that somtimes... no one can handle buying outright calls when you lose so often... i can't seem to handle that! ..

    i've been thinking about buying some 15 wide flys at 700.. cause i don't doubt at all it will get their... its been following the high call strike open interest right up the month expires. at times breaking right through it.
  9. dolbo


    I thought that the calendar spread typically benefits from an increase in IV due to a decaying vega of the fronth month option?

    Are there any historical data on AAPL option volatility on the web?
    I am curious to see what a typical IV skew is between the earnings month and the next month and what % of the vega difference is required to offset that.
  10. 1245


    You will benefit if the pricing in the market place in incorrect. If earnings produce a small move and you exit at the correct time, when ever that is. If the stock is very volatile up to and including earnings, and your short those options, then you're stuck with the next month and vol drops....not profitable.
    #10     Sep 9, 2012