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Posted

Hello!

Sorry for the basic question. I have noticed that bidding on prices for spreads (eg, calendar spreads) are usually done through a combo order (rather than separately). How is this done to achieve the best premium for the front month (compared to bidding separate legs), particularly as profit heavily depends on this?

Thanks!  

Posted

If you buy options separately (technique known as legging in), you expose yourself to directional risk. When we buy calendars (or straddles), we aim to be delta neutral. If you leg in, you start the trade with delta bias, and if the market moves against you, you start losing very quickly. 

Posted

Thanks Kim. I had understood legging as entering a trade after observing a move (eg, the day after), although I understand from your comment that a move may happen immediately after one part of the spread is filled (the other not).

What I do not yet understand is how a combo order calculates a favorable price for the short when the spread bid is filled - is it a case of accepting what is given?

Thanks!

Posted

We don't really care what is the short price - all that matters is the spread price. We always compare spread prices to previous cycles for earnings calendars, this is how we know if the price is good.

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