FB Reverse Calendar

[cuegis 683]

Take a look at the profitability of a FB reverse calender

You can tweak your strikes but, just as a starting point....Buy Oct Monthly 130 STRIKE/ Sell Nov 130 STRIKE

You are buying 18 IV and selling 26 IV

Of course, because of the solid logic of it, without giving a second thought to it, most traders would not consider buying the front month and selling the next month/

But, in this case, in addition to buying a MUCH lower IV than you are selling, ...Surprise...the theta is positive for this position.

So, there is positive theta AND positive gamma.

FB needs to move $4.00 to start creating profit.

IV is trading at a lower number than Historical volatility.

Basically every variable is working in your favor.

You need to break out of the mindset that , it is an "absolute" that the front month will decay at a faster rate than the next month and THAT, and that alone, negates any consideration of doing calendars in reverse.

Edited September 8, 2016 by cuegis

[Yowster 9,180]

I think the biggest problem with selling calendars, from a retail trading perspective, is the large amount of margin that is consumed (since brokers will treat the short leg as uncovered and require the same margin as if its a naked short position) - thereby making the profit % on the small side when you take the gain as a percentage of the margin that the trade requires.    I'm not saying that you can't make money doing this trade, I'm merely saying that the large amount of margin required will make the gain quite small from a percentage perspective - you max gain is the upfront credit that is collected and in this case that would likely represent less than 10% gain, and since keeping all the credit will require a huge move your gain will likely be less that the credit you collected.

[cuegis 683]

9 hours ago, Yowster said:

I think the biggest problem with selling calendars, from a retail trading perspective, is the large amount of margin that is consumed (since brokers will treat the short leg as uncovered and require the same margin as if its a naked short position) - thereby making the profit % on the small side when you take the gain as a percentage of the margin that the trade requires.    I'm not saying that you can't make money doing this trade, I'm merely saying that the large amount of margin required will make the gain quite small from a percentage perspective - you max gain is the upfront credit that is collected and in this case that would likely represent less than 10% gain, and since keeping all the credit will require a huge move your gain will likely be less that the credit you collected.

Honestly, I must confess...I just did not consider the margin aspect of this trade.

But, margin aside (and that is a lot to put aside)...I think it is one of the rare opportunities to have all of the moving parts working in your favor.

I'm still trying to figure out why this trade has positive theta and the only thing I can come up with is the huge IV difference.

The Nov has SO MUCH more premium to decay that is passes the theta rate of the Oct.

So you have positive theta AND positive gamma, and you are certainly on the opposite side of the retail community because they would never consider doing this.

You also  have IV lower than HV and , I would think, at these levels, a $4.00 move in FB over the course of 6 weeks is in the (90%++ range.

 

I have a limit offer sitting with IB and I right clicked on the (selling) trade and chose "check margin requirement" and all it will give me is the amount of credit I will receive. It says nothing of what the margin will be.

If you use IB, do you know of another way to check what the margin will be (with them).

They are probably more "liberal" with margins than other brokerages.

Edited September 8, 2016 by cuegis

[Kim 7,943]

First, the margin requirement makes the trade very inefficient from margin point if view. You are correct that you are selling higher IV, but that higher IV is there for a reason - November options catch earnings. Which means that Nov IV will probably continue rising, offsetting the theta gains. So in any case, you need the stock to move. And even if it moves, the gain as return on margin will be probably around 5-7% best case. On the other hand, the risk is pretty small as well. So if margin is not an issue, it could be not a bad trade from risk/reward perspective. 

[cuegis 683]

6 minutes ago, SteadyOptions said:

First, the margin requirement makes the trade very inefficient from margin point if view. You are correct that you are selling higher IV, but that higher IV is there for a reason - November options catch earnings. Which means that Nov IV will probably continue rising, offsetting the theta gains. So in any case, you need the stock to move. And even if it moves, the gain as return on margin will be probably around 5-7% best case. On the other hand, the risk is pretty small as well. So if margin is not an issue, it could be not a bad trade from risk/reward perspective. 

Like I mentioned in my response to the previous post...I cannot figure out how to get IB to show what the potential margin of the trade would be.

I have the calendar on my screen with a limit order, above the market, to sell.

When I right click on "check margin" all it shows it how much credit I will receive. It says nothing about what their margin will be.

Do you know of another quick way to check the margin in advance?

[cuegis 683]

It seems like the margin would be around $3100.

I need to re think this.

If it were not for the margin this would be one damn good trade!

 

[Kim 7,943]

I see 4.5k. Even with 3100, it's way too much considering the credit you get.

[cuegis 683]

3 minutes ago, SteadyOptions said:

I see 4.5k. Even with 3100, it's way too much considering the credit you get.

You are right.

Thank you for the feedback.

It is not like me to overlook 2 such important factors (earnings and margin).

I just have been thinking about reverse calendars in general lately.

Because, if not for margin, they could be a very good thing.

But, if you look around at many calendars, during non-earnings periods, it is more common than not,  to see the front at a much lower IV.