Ok, got it. You'd be rolling into the synthetic call for less than fair value of the real call (ES option) at the time. Not sure how you're going to deal with the differences between ES and SPX cash to make this work though.... Momoney.
MoMoney, Couple of clarifications: "When you're that far out (in time), I would suggest it's more of a vega play." -- I don't completely follow this (but I get the point about VIX being so low). Why would it be more of a vega play than a 30-day JAN spread plus later, a 30-day FEB spread? "Are you planning on holding for only 30 days? In which case the positions will not gain much from time decay." -- THe Jan spread was, say $1. I found the Feb spread to be $2. That tells me the theta decay across the two months are equal (bizarre, I know, since theta decay is supposed to be exponentially more during the last 30 days, but that is what I found). So, holding for the first 30 days out of the 60 days should net me 1/2 of the total theta decay.... "If you're planning to hold till near expiration then the range of probable finishing prices is twice as large (roughly) as a 30 day spread, so you really do need to start out twice as far OTM to get the same probability characteristics...unless you're not bothered by that and base strike selection on support/resistance etc." -- Exactly. I know probabilistically, the price range over 60 days is 2x larger than the 30 day price range but if you rely on TA, this is not the case. Therefore, going out 2 months does not necessarily mean I need to go twice as far OTM -- maybe 1.5x as far OTM. I'll provide examples over the weekend... EDIT: This whole discussion of going out two months instead of one is spurred by this low VIX. To get any meaningful credit from a 30-day spread, the strikes IMHO are to too close to the money. Am also concerned about what happens to spreads if vols pop suddenly... and would like to add some +vega positions to my portfolio...
You can't hedge your vega in these w/o obliterating your credit; the exception would be to buy CBFE VBI futures. IB ticker: VBI > Future > choose contract month. This will only work into a declining market. The overwhelming exposure is gamma in these deep otm spreads. Very little vega unless you're very close to the strike. Even gamma is muted when you're neutral on deltas. Therein lies the problem; they look fantastic when they're initiated, untenable when you're at risk. Best-practice would be to go long the atm straddle in some ratio that allows you to hedge a portion of the gap-risk and possibly provide for some convergence-gains. If you're losing on your hedge you're making bank on your credits. Most of you will actually enjoy being long gamma when you're neutral as expiration approaches -- you'll be praying for movement! Moral to the story: When the necessity to hedge/roll-vertically presents itself, it's already too late.
I have no idea either. I've learnt it's best to ignore most of what I say! Basically, with options closer to exp. they become more sensitive to theta/gamma as we all know. Further out and vega is more dominant. So, if you are holding only for the first 30 days, you haven't given it a chance for theta take action ipso facto it's more of a vega play (in the wrong direction, if you think that IV and spot vol will go up) [EDIT] Further to riskarb's post above, yes, if you are FOTM then vega is still minimal. Well this does look interesting. I suspect if you actually try and get a fill on both of these the prices may come more into line with expectations though anything is possible with SPX options. I personally don't think you will get 1/2 the total time decay but there is only one way to find out! In addition, delta/gamma trumps here. If you got the direction right then it won't really matter how much if any, time decay you got. You can often take profits pretty quickly. If you got the direction wrong.... Yep, VIX is low but we've been here before. Your logic is sound with respect to there not being any strikes OTM worth it and I'm sitting January out at the moment as far as credit spreads go. However, I would also take the same view of February. I personally never go short gamma/options more than 40 days out from expiration and it's easy to get misled by the larger premium but it has to be looked at in the context of the longer time frame and therefore it is no better IMO. Anyway, good luck. Will be an interesting experiment if you take it. Momoney.
While I certainly would not disagree I would slightly quibble on the last pt..."moral..if you need to roll hedge its too late..." actually by looking and making a plan when your 15pts away you can and I did roll at no cost in Dec from 1285 to 1295 over a period of a couple of days by closing the put spread opening a new put spread...then rolling out the call ...granted it was complicated and involved some new risk (I also had about two weeks to go) but again able to do it. I agree if you are already at or within a few points of your short and no more time your absolutely right.
Donna, that's only a logical move in hindsight; if you're certain the market will not violate your rolled-strike, which of course is impossible to predict. Nor is it possible to predict the nature of the forward-vol... what happens if the market gaps 5% lower on some terrorist-scenario? Your hedge opportunity is now 30 points underwater. What happens to your PnL after the market blows through your new, rolled-position? You've taken more risk and locked a loss on both the initial and rolled credit spread. Do what you will, but I would never be caught in that position.
MoMoney, Thanks for the replies. Since you are sitting out credit spreads for Jan (and Feb maybe), what do your positions look like?
For the past 2 days I've been sitting out Jan involuntarily. Damn MMs won't take my order at .10 off the mid. I called the trading desk and they were less than helpful. ryan