Re: [TheOptionClub.com] Re: Calendar Chat

Thanks for wading through my error field question and getting to the root cause of my confusion.

I did not notice that the back month Vol had dropped so much and that it was the reason why the position lost money if it was held until expiration.  I was looking at the Risk chart for a Feb / Mar 130 PUT calendar which had very similar characteristics as the Dec / Jan 130 PUT calendar in my example... so when I saw on expiration Friday the close was 127.91 I thought the position was still safe under the "green umbrella" until I calculated a loss on the position... it was not until I used the volatility adjustment did I see that 127.91 was outside of the profit area.  The light bulb is now on.....

David,

You are absolutely right... I would have sold the position after 15% profits in 12 days.  I am just trying to understand the whole picture.....




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On January 16, 2010 at 5:48 PM janet_earnest <janetearnest@gmail.com> wrote:

 

In a word - volatility

The back month volatility dropped 4.5% - this caused the value of the long option to drop in value.

Profiting with a calendar is normally intended to be from the front month decaying while the back month has very little decay. But if volatility is dropping, the back month option also drops in value (by more than time decay) making it more difficult to make a profit. Movement of the underlying adds other factors to potential profits. You are seeing why calendars are best during stable or increasing volatility.

I'd recommend using your TOS platform to better visualize volatility impact. First put on a simulated trade (feb-mar calendar) and then you can use the little wrench over to the right under where it says "delta" to increase or decrease delta and see the impact to the trade. The "more" button that is now available towards the middle of the screen allows you to vary the volatility seperately for each month. Also look at increasing volatility while you are there. This should give you a great visual on volatility impact.

Good Luck with your class and eventual calendar trading.
--- In OptionClub@yahoogro ups.com, Joey Huckabee <trading.ocyg@ ...> wrote:
>
> Ok guys I am confused.... I am in the Dan Sheridan class for Advanced Calendars
> and so I was taking some time tonight to simulate some trades with TOS
> thinkBack.  During the mini-presentation here at option club and the first day
> of Class they mentioned that IBM has been used for years as a steady source of
> income using Calendars.  Well I thought that would be a good place to start so I
> fired up the trusty old TOS platform and began to run some positions in IBM.  I
> wanted to focus in on one particular trade, on 11/23/2009 I placed an IBM 130
> PUT Calendar on for 1.50 debt.
>
>                    BID   ASK   IV
> 130 PUT DEC09      $3.30 $3.40 17.09%
> 130 PUT JAN10      $4.80 $4.90 19.76%
>
> I marched the date forward to expiration to see what happens and these are the
> resulting prices:
>
>
>                    BID   ASK   IV
> 130 PUT DEC09      $1.93 $2.04 0.00%
> 130 PUT JAN10      $3.35 $3.45 15.29%
>
> If I sell this position on 12/18/2009 for 1.415 (mid price) that gives a profit
> of 6%.  Ok so that is nothing to get upset about but it is no where near the
> 100% projected by the risk chart (since we closed on 12/18/2009 $127.91).  Now
> if I click forward one more day then the prices look like this:
>
>                    BID   ASK   IV
> 130 PUT DEC09      EXPIRED     0.00%
> 130 PUT JAN10      $2.74 $2.80 14.81%
>
> Now if I sell the JAN10 PUT at $2.77 I bank a hefty 84.6%, but my dilemma is the
> DEC09 PUT option was ITM so I had to sell on 12/18/2009.. .. Can someone help me
> out here?  What am I missing?
>
> thanks,
>
> Joey
>