The problem with calendar spreads

Discussion in 'Options' started by chrismontez, Jan 23, 2008.

  1. Well I did it again and for sure it is the last time. Expected a drop in Feb so loaded up on QQQQ atm 48 sp puts at $180 . Decided to reduce my cost a little and sold the jan otm 47 puts against them for $30 shortly before expiration. Aghhhh. On a big drop like this the otm's went itm pretty quickly and I barely broke even when I had to close it out.
  2. There is no problem with time spreads! You seem not to have understood them. That is all. First, the best environment for time spreads is a nice and calm environment. The lowest the vol the best! Think like woodstock era people. They seek no problem--So should not you. There are exceptions. For instance, if I were you, and I was expecting a higher vol (increasing vols make money for T spreads) and since you want to play the Qs you should have used a lower strike (for instance if Qs at 47, choose 45). When Qs sink, vol goes up. You win because because time is passing, you are negative delta, and vol rising. If Qs goes to 45, sell! The profit is max when stock is at strike.

    In time spreads you want stock to move to your strike. Sell when it hits the stike. but do not forget vol, if it goes down, time spreads goes down.

    Also, avoid skews. That means, a hurricane is coming (fast movement of stock) and this might throw your time spread in the losers bin if you pick the wrong direction or vol crashes.

    You need to understand options may better my friend that you seem to currently understanding.
  3. wenzi


    You have 47 / 48 strikes, it is a diagonal, not a calendar.
  4. So what question doesn't change.
  5. bh_prop


    Actually, if you want to nitpick, it's both because he is crossing months

  6. Tums


    vertical plus calendar = diagonal
  7. hopback


    as stated, diagonal
  8. "You need to understand options may better my friend that you seem to currently understanding."

    Either you didn't understand what I wrote or you don't understand that if there is a big gap down and your short otm's are now itm they are increasing in value at the same rate as your longs. As I said it was a dumb play picking up chump change on what I thought was a safe short. But I certainly wouldn't have put it on for the $5 if I followed your advise and shorted the $45 Jan puts.

    I should have called it by it's correct name a diagonal, but my point was that was the last time I short a near month against the far month to pickup some change.
  9. I may have misunderstood what you wanted to say. I understand that the stock was around a price (which I was not clear what it was) and then you placed a time spread (bought premium for longer term (call or put it does not matter for time spread) and sold premium short term.

    I agree gaps are the problem of not only time-spreads, but many other positive theta income spreads.

    But for indices, typically they do not gap as stocks do. That is why I place income spreads on indices only.

    So my point is that when it gets to your strike (if you have a time spread) take it off. If it goes beyond it, you start to lose with respect to the maximum and not with respect to your entry point, unless of course you entered with ATM time spread or if vol went down.
  10. wenzi


    Yeah, just pointing it out as the thread title is "The problem with calendar spreads", not the problem with Diagonals
    #10     Jan 24, 2008