21 lines
1.3 KiB
Plaintext
21 lines
1.3 KiB
Plaintext
only a one-month difference between the two options, rho is very small.
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Overall, rho is inconsequential to this trade.
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There is something curious to note about this trade: the gamma and the
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vega. Calendar spreads are the one type of trade where gamma can be
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negative while vega is positive, and vice versa. While it appears—at least
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on the surface—that Richard wants higher IV, he certainly wants low
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realized volatility.
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Bed Bath & Beyond January–February 57.50 Put
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Calendar
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Richard’s position would be similar if he traded the January–February 57.50
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put calendar rather than the call calendar. Exhibit 11.4 shows the put
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calendar.
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EXHIBIT 11.4 Bed Bath & Beyond January–February 57.50 put calendar.
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The premium paid for the put spread is 0.75. A huge move in either
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direction means a loss. It is about the same gamma/theta trade as the 57.50
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call calendar. At expiration, with Bed Bath & Beyond at $57.50 and IV
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unchanged, the value of the February put would be 1.45—a 93 percent gain.
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The position is almost exactly the same as the call calendar. The biggest
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difference is that the rho is negative, but that is immaterial to the trade. As
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with the call spread, being short the front-month option means negative
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gamma and positive theta; being long the back month means positive vega. |