reverse cal spread with different future exp

hi i cant model this with my software, anyone know off the bat are there any additional concerns if you try to do a reverse calendar spread on es mini using 2 different underlying futures?


buy atm nov call (dec future)
sell atm dec call (dec future)

vs

buy atm nov call(dec future)
sell atm jan call (mar09 future)

 

Yes, there is an additional concern. In the second example you are essentially long the dec08-mar09 futures spread.

For example, let's say that every call has a delta of .50. You buy 10 of the nov atm calls, so you're long 5 deltas. Effectively you're long 5 dec futures.

If you then sell 10 of the atm jan calls, you are now effectively short 5 mar09 futures.

So you effectively have the dec-mar futures spread on 5 times.

You can either decide to accept that risk, or to make a more perfect hedge you would sell 5 dec futures and buy 5 mar futures. That way each option is hedged against its own underlying, and you eliminate the futures spread risk.

 

Understood, very good point, thanks dmo!

I am trying to figure out if it's worth it to try get a better net vega by going out to mar vs just doing dec for the back month. I noticed the bid/ask spread for nov/mar is 20pt!!! while nov/dec is 5pt. I got filled at mid, so it's 7.5pt(10pt-2.5pt) loss for a ~1pt on vega (after discounting the theta difference). Not to mention when you try to close out, you have to pay for the spread again.

 

I just took a look at the ESH9 (March ES), and I'm a little shocked how illiquid it is. Over 4 million contracts traded today in the Dec ES, and 153 traded in March? I would try to avoid anything that illiquid if possible.

 

Just exited all 30 contracts at +2 pt a pop at 28.

Funny how things work out. I was expecting to profit from a big up move and a sharp drop in IV. But instead made a small gain from the continuing gap downward from strike.

One lesson to be learned: wish i saw dmo's note to check the volume before getting filled, got absoutely KILLED from the spread and illiquidity. Most of the times i couldnt even get an ask price to print.