Actually as I am studying it, I am looking to see if it is a way to play a run to the short strike in OCT and then close the position at the expiration of OCT. If I was not clear I apologize. I am looking to see if I can close the entire position after the OCT expiration for a net credit. Not necessarily run through NOV and DEC...
Your position is a typical calendar butterfly. The objective is for the near term short to expire worthless, leaving you with a 2:1 backspread (long lots of gamma and theta working against you). You then have a choice: close the backspread for a profit, or hold, hoping (as one does with any backspread) for a significant market move in either direction. Mark
Phil, knowing your trading style and after running this through Optioncoach's Position and Hedge Financing Calculator the position appears clearer. You are trying to "finance" a call calendar by reversing it in the back months. Being a risk/reward kinda guy, benefits over other alternatives are still unknown to me.
Better said then I tried to lol.... I think my initial goal is to close the backspread for a profit at OCT expiration. Quasi getting the calendar for no cost and not having the market fall too far away. Based on rudimentary modeling, if the market moves much lower with IV increase, the backspread could only be closed for a net debit (loss). I am looking for what adjustments to make in that situation (possibly sell further OTM calls to take in premium.) I may have to do a 1/2/1 to test out since the cost and risk will be quite small....
AHHHHHH finally someone put my thoughts into English. yes that is what i was thinking in a way. Crap I have turned into riskarb except what I say truly makes no sense... yes rally, that is what my mind was hovering over but I cannot articulate very well today. Benefits are still unknown to me as it is hard to predict and model but it is raising my interest....
Well, we all know you dont speak greeks. Instead, you speak in financing margin and hedges with other positions LOL As far as benefits, short of any mispricings or volty skews that could be exploited if they exist, i highly doubt there are any but i'd be glad to learn something new if you discover some hidden edge
That makes sense. The long and short calendars are counteracting against each other. As the short OCT options decay, the long calendar will gain deltas. The optimal place to be at OCT expiration has to be 1360 IMO. So the deltas will eventually start to reflect that. I see, that would explain why you aren't simply looking at 2 x 1360 OCT/NOV calendars and then writing a DEC 1360 CALL if/when we get there. However, unless I'm mistaken, opening the position for even/no cost does not prevent you from possibly suffering a loss by OCT expiration. If the market crashes, that would I suspect be better than if the market sits still. A market crash would benefit the short calendar component (ignoring vols). In other words, the long calendar wants a move up to 1360 and the short calendar wants a large move away from 1360. This is likely to result in a risk hole somewhere in between these two despite putting the position on for no cost. In fact, you're having me believe that the entire OCT risk profile is at or above zero (or equal to net debit on the trade). My spidey sense says no...otherwise I might join in TBC MoMoney.
No you nailed the risk, if the market falls too far, the OCT is worthless and the NOVs are not rich enough to cover the DEC and you have a net debit to close and a loss. There is where I wonder about follow up steps... If the market moves to the short strike, the zero cost to enter coudl become a huge net ceditr after OCT expires worthless.
Not so much an edge, just another way to play the move higher or sideways in the S&P. I imagine doing OTM call and put cross month FLYs would over complicate things so I might look at it and see what it ultimately ends up being...
Overcomplicate is an understatement IMO. I am sure you have considered this but any leg/position you add to your already existing leg/position will trade off reward for risk in one way or another. The only ones who benefit from these searches to "the perfect option position" are brokerages and MM's. Just my opinion. I need to stop peeking in this thread.