This spread starts out 90 delta and 3 gamma, short. It takes a move to get the curvature working in your favor. If you think 1502 at expiration is break even, you are mistaken. Your long Jan options would carry time premium, giving you a huge profit. What is the spread worth if SPX gets to 1425 next week? How about if it's 1425 at expiration? How about if it's even higher (1431) at expiration? Get back with the answers. Mark
Also with all due respect to my buddies at ToS, the prices used in the analyzer are always off from the actuals for some reason. I would do analysis there in ToS and then when I looked at the chains, I could never get the net debit/credit they were modelling. Double check which prices they are using.
rdemyan, you are correct. There is always going to be a risk hole between your short gamma in the front month and your curvature in the back. Due to the fact that your back month is mostly vega, your curvature won't kick in as fast as you need it. Especially true if you must have a credit. As i said in my previous post, if you want a credit then you must widen the strikes and have a big gamma exposure. There is no way around that. The curvature approach is alot more involved then simply putting on a calendarized backspread and going to sleep. It is more of a long gamma approach in the back months that is mixed with a short gamma approach in the front months. In order to gain positive expectancy, there is trading that needs to be done in order to pay for all that vega you are buying so that you can actually end up with this "cheap" curvature. Remember, you are buying all these extra wings. They are bleeding extra theta each day. Only way to pay for this is through a lot of short gamma in the front months or flipping the spot.
The green line is the risk profile at expiration (notice the date on the graph for the green line is 12/15/06). The white line is today's date and therefore is the risk curve for today. I believe the curve assumes a constant volatility, which isn't shown on the results (but I'm pretty sure is around 10 or so).
My apologies for being OT once again... If anyone here is feeling in a riskarb/mav-ish mood, I've tunneled through Neftci, Wilmott and Grimett...God help me, what else to read? I promise to be brief and on topic if I ever post again. Dazed, Confused and Ugly
I was filled yesterday on a DD for Dec/Jan: Dec 1350/Jan 1325 puts Dec 1450/Jan 1475 calls No fill on the Dec 1390/Jan 1375 puts tent pole, will look again today and see what I like. I also bought a SPY call spread: Dec 140/141 to add "curvature" (am I using that term correctly? ).
It's bit off centre to allow for an upwards bias in the actual, but has a reasonable amount of vega to allow a cushion should there be a quick drop. Does anyone know how to put multiple images on one screen? Still Ugly
When you add one leg to any portfolio, you are actually changing your risk from one form to another. Most of the time the long wing is a waste, like an insurance. By adding the long wing, you buy the insurance and it reduces your credit. I will prefer to buy the wing at the proper time. You need to have more active adjustment. It is not a good strategy for a passive investor.