Hi I have done a Calendar and Reverse Calendar spread and like to know if anyone can point out what I am missing here?? ES Options Trade Trade number 1 Reverse Calendar Trade I buy the ES (expire on 14 June) 1525 Call for 17.25 points I sold the ES (expire on 29 June) 1525 Call for 31.50 points Net credit receive =+14.25 the plan is to square off everything on 14th June regardless of where market is. Scenario one Market goes down all options now OTM. My buy leg will be worth 0 and my sell leg because it is OTM so will be worth a little. I cover back as long as less than 14.25, I win Scenario two Market does up all options ITM, My buy leg will be worth as much as it is in the money, my sell leg will be worth the same amount + time value. As long as time value is less than 14.525, I win. Scenario three Market stay at where I enter ATM. My buy leg will be 0 and my sold leg as long as it is less than 14.25 (2 weeks left to expiry assuming no changes in IV) I win. How can I loss on this trade???? Trade number 2 (Calendar Spread) I sell the ES (expire on 14 June) 1560 Put for 48.50 points I buy the ES (expire on 29 June) 1560 Put for 41.50 points Net credit receive =+7.00 no matter where it end I make 7 points. What am I missing???
You are missing the fact that the June 14 leg settles to the JUNE ES contract while the June 29 leg settles to the SEP ES. Add the difference to your vol risk. No such thing as a sure win these days.
This is why newbies lose money. I do not even need to read 2 lines of the OPs post or break down the position to know he is missing something. as soon as I saw the question of whether this is a sure win trade, a.k.a risk-free, you can tell something major is being overlooked.
The "pros" also lose money. Bank of Montreal (BMO) lost 450 million dollars * on natural-gas options through their broker Optionable Inc. Mr. Lee, the man at the centre of the money-losing trades is on a leave of absence. They have a lawyer looking into it now. * I think this has been revised to 650 million dollars.