Actually this is the same thing I proposed earlier, I just recently had time to look at the net greeks of the position and see how they are different for ITM or OTM positions. Actually I am financing the long OCT/NOV calendar with a NOV/DEC short one. I want to see live ES/EW quotes tomorrow since I am working off of Friday's quotes so I can actually price these and see if they are as expected. So still running my tests..
you are right, i was looking at iv's position and addressing your post have you worked out the different vol scenarios?
Hard to do as I am looking at static greeks. Gonna have to use ToS and model each calendar and combine the results. At the inception, the position is about vega neutral (actually slightly -vega) but want to test what happens when market moves higher and vols drop and how deltas offset when market drops but IVs increase. What I am going to do if I enter one this week is post the position Greeks so we can follow the changes and keep modeling as we go. A 1395 cross month FLY has about the same delta as a 1355 cross-month FLY. So I wonder if the net deltas always stay flat whether the market moves ITM or further OTM. Including ATM corss-strike FLYs, the position has a net delta of 0.0 mroe or less. So I wonder if this will neutralize market moves for the most part while waiting for the short to expire worthless. Deep ITM or Deep OTM the position seems to be flat. ATM is where the largest gains are. I am sure there is a profit hole/loss point but so far it seems minimal if you exit at expiration of the 1st wing. But still do nto see it as I have not fully modelled. Large risks comes in if you hold through to NOV expiration.
I see. That what I thought (margins). BTW , you should take slightly OTM position , this was you will have a small vega gains if market goes either ways.
Thats sounds right, but here is why i think its nuts. Say the market expires at your strike which is what you want for your long calendar. Now you cant have the vols increase too much on you since your short calendar will get hurt. So an OTM call strike might be the way to go? To me, it appears you need a pretty accurate prediction on BOTH delta and vega to make this work. I have a hard time getting even one of those right. LOL Given, the risk may be very small but can you really pull it off? Let's see what happens
But I plan to get out at expiration of the first short wing... If market expires at strike, I take the profit i the remaining backspread. Or even better. Assume it is a 1390 strike and market is at or below 1390 at expiration. I sell 2x 1395 in NOV to convert to bull call spread and buy back DEC 1390 for a net credit and I have added to my net credit and converted my position to bull call spreads with no naked risk.
Yes the idea so far is to go OTM with it like the approach in the diagonals. I am looking right now at 1395 strike on ES...
It doesnt matter whether we look at the position as a backspread and a short call in the current month or as a long and short calendars. The result is the same. I am still not understanding what the underlying bet is here. It sounds like you are playing for theta and expiration near your short strike, while to me it appears vega dominates the position. I cant imagine the position moving more than 20 cents away from neutrality. You just end up paying the vig on 3 legs. I am deeply puzzled by this position as i cannot understand for the life of me why one would put it on. Would be nice if riskarb peeked in here and made a comment on this.
We may get a little bump in vol b/c NK. Might help the DDs unless it slides you into that saggy bottom. Just don't run into a tent pole! Now what about all those VIX naked calls I sold?!:eek: