Trade 54 Ratio Calendar Spread For Early Xmas

Terrapin Trader, ,

The Position:

This trade, we are selling two of the Nov 7400 puts and buying one of the Dec 7400 puts. For a debit(cost) of….3

The Greeks

Those calculations made flesh!

Delta 0.2005 (0.2693×2-0.3381)

Gamma 24(19×2-14)

Theta 1.8823( 1.4478×2-1.0133

Vega:1.6529 (5.8016×2-  9.9503)

The Wisdom of The Trade:

We are not giving away much in terms of delta. Gamma is huge however and will get even more yuge ( to quote President Trump)near expiry. Theta plays nicely for us at 1.88– we like them apples. Vega- a very modest number at 1.65. We are looking at the front month short options decaying much faster than the far month. That is the underlying principle of the calendar(time) spread. All things being equal the November puts go out worthless while the December put has some value > the debit of 3. Margin required as you have sold more options than you bought.

What if It Gets Ugly?

Any number of factors can affect this trade and so it depends on your ‘view’ of the market. There will be wobbles along the way. The only worrying metric is gamma. As long at FTSE stays above or around 7400 we will se a nice profit. Of course this is a trade of the week and we might exit in a week. It will be fun to see it to expiry though.

When is a good time to Panic?

Let’s say the market gets really crazy and takes a major dive down to 7200. You may find that the puts are evenly priced, given the volatility skew to the front month.That can be a hefty loss. Exiting a losing trade is hard. Set a limit. You think a loss of 30 on this trade is enough punishment? Close out. Adjust. Move on. Never ever be married to a position when the facts change. Can you say Rho?

 

 

 

 

Published by Terrapin Trader

First found out about options in 1995.From the arcane magazine Exchange and Mart! First trade- a covered call on VOD in 1999. Made 10%,VOD almost doubled. That's when I realised I was not a good trader,and I was forgiven thanks to the amazing world of exchange traded options

3 Comments

  2. So now we have the Dec 7400 put at 51 and the Nov 7400 put= 18(x2)= 36. therefore this is a very nice profit having paid 3, you could close out for 15. Of course this needed some margin so it’s not a simple 400% but probbably more like 10% in 4 days. Once a month -that’s a big healthy profit-better than your ISA at 1.2%

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