I'm not sure that searching for an "authority" on any specific strategy is a
fruitful approach to take but that aside, a short calendar functions pretty
much like a short butterfly with a couple wrinkles related to vega and - in
the case of a retail trader - oddball margin requirements.
Think of what kinds of scenarios benefit or hurt a reverse calendar and you
should be able to intuit what kind of scenario you'd consider putting the
position on. The front month leg benefits from near term volatility and/or
big directional movement while the back month option benefits from stable IV
combined with the underlying dying right at the front month strike. Often
maintaining IV and getting that front month strike to die out worthless
involves contradictory behavior (i.e. why would back month IV stay high when
essentially there is little movement in the underlying vehicle that hovers
near the front month strike price?). so clearly, with the reverse calendar,
you want price action on the underlying to be very volatile or you are
looking for a near term event that drives price away from your front month
strike by enough to basically wipe out the premium differential between the
front and rear month strikes - in other words, you want to capture as much
of the credit your receive for initiating the trade. The same principle
applies for the short fly (which I would recommend that you study in
conjunction with the calendar) in that you basically are looking for the
underlying price to move away from your long strike and toward/beyond either
of the short strikes. With the short fly you also receive a credit that you
hope to eventually capture most of via subsequent price volatility.
The added twist to a reverse calendar - versus the short fly - is that under
some strange circumstances you can have front month volatility die while
back month volatility can increase. This frequently occurs in special
circumstances such as earnings announcements tied to the back month or
something like an fda decision on a drug stock slated for release in the
back month. I'm not too familiar with retail margin but I think, for some
arcane reason, brokers don't tend to recognize the front month option as a
hedge for the back month option which of course it is until the front month
expires so you probably have to put up more capital than the initial credit.
The correct margin should probably be tied to wherever the spread happens to
be trading and brokers should be aware of this. I'd guess that thinkorswim
should be the most progressive on this treatment so maybe folks more
familiar with their requirements can chime in.
-----Original Message-----
From: OptionClub@yahoogro
Behalf Of asdfffg1
Sent: Sunday, December 20, 2009 6:15 PM
To: OptionClub@yahoogro
Subject: [TheOptionClub.
I was going to ask if anyone knew the authority on reverse
calendar spreads. Now that I've researched it, I'm lucky if someone here
knows a trading book with even 'ONE' chapter devoted to this spread and it's
adjustments. Not one trading book on amazon has a book with a chapter on
this spread strategy. I sincerely appreciate any warning concerning this
very unfavorable style of trading. I believe 99% of those comments are
coming from a good place. Regardless of this fact, I would still like to
study this strategy in more depth. If anyone can answer this, I'd be very
grateful.
------------
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