Thoughts on ITM calender calls

Discussion in 'Options' started by thebubs, Aug 26, 2009.

  1. mike007

    mike007

    Does an OTM decay faster than an ITM? Yes or no?
     
    #11     Aug 26, 2009
  2. Same strike? No.
     
    #12     Aug 26, 2009
  3. thebubs

    thebubs

    Right but with the calender put your direction is further down (if your right), it is a bearish bet right? where as a calender call is short term bearish, long term bullish (if you right)- thats my thinking
     
    #13     Aug 26, 2009
  4. MTE

    MTE

    That's where I disagree with you. A put calendar is exactly the same bet as a call calendar at the same strike until the short option expires, what you decide to do after that is actually a new trade.
     
    #14     Aug 26, 2009
  5. spindr0

    spindr0

    So today you believe/know that the underlying will be down for a month to the strike by September expiration and then up after expiration? Impressive!

    I'm with MTE in that both calendars are bearish and when you cover the short leg (or it expires), it becomes a new trade.

    In addition, doing the ITM calendar has 2 potentail drawbacks. The slippage will tend to be larger and you'll also have the possibility of early assignment if the underlying rises and the short leg gets near parity.
     
    #15     Aug 26, 2009
  6. spindr0

    spindr0

    They're the same.

    An easy way to see this is to model the positions. Buy the OTM calendar and sell the ITM calendar. Use fair prices. The graph over time and price will be a straight line at ZERO indicating that there's no potential gain or loss. That means that the positions are synthetically equivalent - what one makes, the other loses and vice versa.
     
    #16     Aug 26, 2009
  7. thebubs

    thebubs

    I think we bascially agree they are both bearish in the near term, the reason why I have started using them is that they are near parity to begin with while the OTM puts seem to have a larger price gap (speaking in generalities, not all of course).

    Your last point I dont agree with or am grasping correctly- if the underlying rises the calender calls will rise together (maybe not in lock step) but with the puts they fall together and if the stock make a huge move up (against you) the puts will both be worth close to zero.
    I agree that to get both legs right would be quite impressive and rare but if one does your return will also be impressive while your risk appears to be pretty small, the front and back month of the calls will never be worth the same, because of time diffrence. The way I see it is its a small risk potential large gain if your spot on
     
    #17     Aug 26, 2009
  8. spindr0

    spindr0

    When you understand synthetic equivalence., you'll grasp that if two strategies are equivalent, they'll yield the same results. Since these two calendars are equivalent, it doesn't matter if the underlying goes up or down. The result will be the same.

    Once you actively adjust these positions (close the short leg) or they change via expiration of the near month, you end up with opposing positions (a long call versus a long put) and therefore they are no longer equivalent. They become new trades with different objectives - and all in all, a heavy dose of wishful thinking.

    Yes, it would be quite impressive if you were spot ON with the call calendar, namely you got a pull back to the strike, the short leg expired and the underlying then reversed dramatically.

    But it would be equally impressive if you were spot OFF with the put calendar, namely you got a pull back to the strike, the short leg expired and the underlying then dropped dramatically.

    Advantage? That goes to the correct guesser or the lucky fool :)
     
    #18     Aug 26, 2009
  9. thebubs

    thebubs

    agreed
     
    #19     Aug 26, 2009
  10. How is that any different from buying the longer term option once the value drops significantly?

    The fact that you cover the short-term option for a profit is a mirage. You still have a loss in the longer-term option that you conveniently ignore.

    Mark
    http://blog.mdwoptions.com
     
    #20     Aug 27, 2009