30 lines
1.9 KiB
Plaintext
30 lines
1.9 KiB
Plaintext
The In-or-Out Crowd
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Pete could just as well have traded the Aug–Sep 50 put calendar in this
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situation. If he’d been bearish, he could have traded either the Aug–Sep 45
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call spread or the Aug–Sep 45 put spread. Whether bullish or bearish, as
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mentioned earlier, the call calendar and the put calendar both function about
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the same. When deciding which to use, the important consideration is that
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one of them will be in-the-money and the other will be OTM. Whether you
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have an ITM spread or an OTM spread has potential implications for the
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success of the trade.
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The bid-ask spreads tend to be wider for higher-delta, ITM options.
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Because of this, it can be more expensive to enter into an ITM calendar.
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Why? Trading options with wider markets requires conceding more edge.
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Take the following options series:
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By buying the May 50 calls at 3.20, a trader gives up 0.10 of theoretical
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edge (3.20 is 0.10 higher than the theoretical value). Buying the put at 1.00
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means buying only 0.05 over theoretical.
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Because a calendar is a two-legged spread, the double edge given up by
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trading the wider markets of two in-the-money options can make the out-of-
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the-money spread a more attractive trade. The issue of wider markets is
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compounded when rolling the spread. Giving up a nickel or a dime each
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month can add up, especially on nominally low-priced spreads. It can cut
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into a high percentage of profits.
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Early assignment can complicate ITM calendars made up of American
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options, as dividends and interest can come into play. The short leg of the
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spread could get assigned before the expiration date as traders exercise calls
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to capture the dividend. Short ITM puts may get assigned early because of
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interest.
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Although assignment is an undesirable outcome for most calendar spread
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traders, getting assigned on the short leg of the calendar spread may not
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necessarily create a significantly different trade. If a long put calendar, for |