[TheOptionClub.com] Re: XLE Aug-Sep Gorilla Calendar

 

Great explanation, Robert. Many thanks
Is this why one uses calendar trades when IV is low and Iron Condor trades when IV is high?
Also, may I request you, or one of the senior and experienced member to explain as to how we can construct the hedge on the calendar trades, for example, would you possibly go with double calendar (ensuring that it is delta neutral) if you are a conservative trader?
Many thanks
Sean

--- In OptionClub@yahoogroups.com, "RobertH" <robhansen5252@...> wrote:
>
> Why does a calendar spread lose money if the option volatility goes down? Here is a direct transcript from a webinars hosted by Dan Sheridan and Jim Bittman. The example on the screen is the Aug-Sep calendar spread in RTH, current price 80.28. August has 32 days left to expiration, and September has 60 days left to expiration. The August 80 calls are priced at $2.20 and the September 80 calls are priced at $3.20. Their example buys 10 spreads making the total investment $1,000.
>
> Jim Bittman: "As expiration approaches, vegas (which is the sensitivity of the option to volatility) go down. So, the 60 day option (September in this example) has a larger sensitivity to volatility than the August option. So if volatility were to drop 5%, then the September option might go down 10 cents for each volatility point (which would be 50 cents) but the August option might only go down 3 cents for each vol point. So there would be a 2 cent difference for each vol point you are losing." Jim kinda got the math wrong here, but I'm sure you get the idea.
>
> In the example on the screen, the vega for the September option is 12.9, and the vega for August is 9.44. So they go on to describe what would happen with each one point drop in vega. September would go from 3.20 to 3.08, and August would go from 2.20 to 2.10. So you lose more in your long position than you gain in the short position.
>
> Thought this might help some volatility deprived readers.
>
> RFH

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