24 lines
1.7 KiB
Plaintext
24 lines
1.7 KiB
Plaintext
Reverse Spreads
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In general, when a strategy has the term "reverse" in its name, the strategy is the
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opposite of a more commonly used strategy. The reader should be familiar with this
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nomenclature from the earlier discussions comparing ratio writing (buying stock and
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selling calls) with reverse hedging (shorting stock and buying calls). If the reverse
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strategy is sufficiently well-known, it usually acquires a name of its own. For exam
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ple, the bear spread is really the reverse of the bull spread, but the bear spread is a
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popular enough strategy in its own right to have acquired a shorter, unique name.
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REVERSE CALENDAR SPREAD
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The reverse calendar spread is an infrequently used strategy, at least for public cus
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tomers trading stock or index options, because of the margin requirements. However,
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even then, it does have a place in the arsenal of the option strategist. Meanwhile, pro
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fessionals and futures option traders use the strategy with more frequency because
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the margin treatment is more favorable for them.
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As its name implies, the reverse calendar spread is a position that is just the
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opposite of a "normal" calendar spread. In the reverse calendar spread, one sells a
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long-term call option and simultaneously buys a shorter-term call option. The spread
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can be constructed with puts as well, as will be shown in a later chapter. Both calls
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have the same striking price.
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This strategy will make money if one of two things happens: Either (1) the stock
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price moves away from the striking price by a great deal, or (2) the inplied volatility
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of the options involved in the spread shrinks. For readers familiar with the "normal"
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calendar spread strategy, the first way to profit should be obvious, because a "normal"
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