Underwater Calendar

Discussion in 'Options' started by Pinozi, Aug 13, 2009.

  1. Pinozi


    I have some calendars on the index which were ATM but now are very far ITM

    I thought the max you can lose on a cal is the amount that is paid - but when I get a quote to get out of these the MM's are flashing a -ve quote (So I would lose more than I paid for the cals)

    So if I just hold these to expiry of the front month what will be my maximum risk?
  2. The quote you are getting is not the real quote. No one would ask you to sell at a price of worse than even money.

    There is a real bid for your spread. If the electronic quote doesn't suit you, enter an order to sell it at any price you choose. You are not required to sell at the bid price.

    As an aside, I don't know how you allowed this to happen. Why would you buy an ATM calendar?

    When you have an OTM calendar that becomes at ITM calendar, at one point it was an ATM calendar. That's when you sell. Sure, it would be nice if that occurred at expiration, but you cannot control that. Instead that's when you bought. Not a good idea.

    Holding to expiration is NOT a good idea, unless you want to make a cheap bearish play here. I urge you NOT to hold this position into Friday morning, settlement day.

  3. Pinozi


    I'll give you the real numbers

    I am trading the XJO options which are the index options on the Top 200 Australian stocks

    Market was trading 4100 when I opened the 4100 Aug/sep Call Calendars

    Market moved higher so I opened some 4300 cals and turned the position into a DC with some more funds

    Whole position is in the red as the XJO got as high as 4500 this morning - so Im just getting some quotes on the 4100's and they want me to pay out to get out of the spread.

    So I was thinking if its possible to lose more than the inital debit paid for a calendar. Shouldnt happen in a stock as you can just exercise each leg, but in european index options I think it is possible as the Sep options have a bearish bias
  4. wayneL


    Ahh Aussie options.

    Basically on any position substantially away from the money, the Aussie MMs are going to be able to take you to the woodshed and have their way with you, via the spread.

    It's a problem of liquidity in a small options market.

    If you go into front month expiry, you are going to be left with a near 100 delta back month call which is going to move basically like the future... and that monumental bid/ask spread will still be there.

    You don't want that.

    I would do as Mark suggested. Put in an ask for the spread and see if they take it.

    Otherwise, close your eyes and think of England darling. :eek:
  5. Pinozi


    I had to pay to close out of some OTM calendars this week - so you can lose more than the initial debit on a calendar.

    I thought since the XJO is a cash settled index the intermonth spread risk was minimal - how wrong I was. I now know its just like trading a calendar based on two different expiring futures contracts - need to keep an eye on the inter contract spread moving

    Anyone else experience a similar thing on say SPX options?