Sunday, June 6, 2010

[TheOptionClub.com] Combine fly and calendar

 

One of the disadvantages of calendars is they are a + vega trades so if IV drops by a significant amount then you loose money.

So in this time of increased volatility would it be dumb to place a Calendar + Butterfly combination trade?

Let me give an example:

IBM - $125.28

Calendar BUY   +1 IBM OCT 10 $125 CALL
              SELL  -1 IBM JUL 10 $125 CALL
              DEBIT           $3.55
              DELTA            0.35
              GAMMA         -1.66
              THETA            2.37
              VEGA             13.19

Bitterfly   BUY   +1 IBM JUL 10 $115 CALL
              SELL  -2 IBM JUL 10 $125 CALL
              BUY   +1 IBM JUL 10 $135 CALL
              DEBIT           $3.77
              DELTA           -7.96
              GAMMA         -2.51
              THETA            2.75
              VEGA            -10.49

Combined
              DELTA           -7.61
              GAMMA         -4.17
              THETA            5.12
              VEGA             2.70

This lowers your vega from 13.19 to 2.70 and the interesting part is if you simulate IV increasing by 10% you make money and if it drops by 10% you make money.
You have a little more -delta now but that could be offset by buying 7 shares of stock.

Ok so outside of the stock moving outside of the profit zone... what am I missing here?  I realize the greeks change but adding or subtracting some positions can adjust for these changes.  This looks like a pretty good way to make money (I know that must sound pretty sophomoric).

Thanks in advance for any input.

Joey


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