As @jamesbp mentioned, put calendars do trade for a credit. In European style options in deep puts you will see this. For example the SPX Dec 21 Dec 19 4200 put spread is trading at over a $70 credit. I'm not familiar with the security you mentioned, but I assume it is a similar situation.
@jamesbp ok so, underlying trading at 2.8 ATM puts 15dte put @2.8= 0.0568 141dte put @2.8 = 0.1499 I'm looking at the 3.4 puts, 15dte put @3.4= 0.5986 141dte put @3.4 = 0.5845 interest rate = do you meen the risk free rate to plug in the BSM? exercise Is european style. no dividends (there is 1 dividend paid yearly but not in these expiry periods)
@jamesbp for the rates you can assume 3%/year call prices 15DTE call @2.8 =0.0522 15DTE call @3.4 =0.0020 141DTE call @2.8 =0.1910 141DTE call @3.4 =0.0336
If I have the calculations right for 3.4 strike spreads ... call calendar priced at +0.0316 ... put calendar priced at (0.0141) ... time box of 0.0457 suggests implied interest rate of approx 3.90% If you have access to a risk graph it should show a 'skewed' risk graph ... call / put calendar should have equivalent risk graphs ... max downside risk of (0.0316) ... the premium for buying the call calendar ... max upside risk of +0.0141 ... the premium for selling the put calendar The max upside / downside risk is logical if you assume that the calls / puts all become virtually worthless when they are FOTM
Thanks.. ok now that you brought in the topic of interest rates I'm starting to think about it.. basically the risk profile of put vs call calendar at same strike is similar, however when you go deep ITM the spread becomes very expensive, and the extra return you get is simply the interest rate difference.. am I understanding it correctly?
There is no "extra" return The difference between the price of the call / put calendar spreads is due to the carry cost ... which in this case is all interest If the spot remains at 2.80 ... whether you bought the call calendar for a debit or bought the put calendar for a credit ... both spreads will probably lose money
as expected.. no free lunch whatsoever. now I'm happy that I just bought 1 lot... Anyways.. I will let this thing run until the next shocking tweet by mr.T , get some vega kicker and then close it out.. Will report back here how it goes..
Interesting... I wouldn't have suspected it but I looked at the risk graph and saw this. If you lower the strike to 3500-3600 then it becomes a debit. And either way, maximal loss at front month expiration will be incurred if the market doesn't rally significantly.