EXHIBIT 11.3 Bed Bath & Beyond January–February 57.50 call calendar.
A small and steady rise in the stock price with enough time to collect
theta is the recipe for success in this trade. As time passes, delta will flatten
out if Bed Bath & Beyond is still right at-the-money. The delta of the
January call that Richard is short will move closer to exactly −0.50. The
February call delta moves toward exactly +0.50.
Gamma and theta will both rise if Bed Bath & Beyond stays around the
strike. As expiration approaches, there is greater risk if there is movement
and greater reward if there is not.
Vega is positive because the long-term option with the higher vega is the
long leg of the spread. When trading calendars for income, implied
volatility (IV) must be considered as a possible threat. Because it is
Richard’s objective to profit from Bed Bath & Beyond being at $57.50 at
expiration, he will try to avoid vega risk by checking that the implied
volatility of the February call is in the lower third of the 12-month range.
He will also determine if there are any impending events that could cause
IV to change. The less likely IV is to drop, the better.
If there is an increase in IV, that may benefit the profitability of the trade.
But a rise in IV is not really a desired outcome for two reasons. First, a rise
in IV is often more pronounced in the front month than in the months
farther out. If this happens, Richard can lose more on the short call than he
makes on the long call. Second, a rise in IV can indicate anxiety and
therefore a greater possibility for movement in the underlying stock.
Richard doesn’t want IV to rock the boat. “Buy low, stay low” is his credo.
Rho is positive also. A rise in interest rates benefits the position because
the long-term call is helped by the rise more than the short call is hurt. With