2
$\begingroup$

I am looking to solely make use of the theta decay and trying to overcome the effects of delta and Vega.

​​If,

I sell ABC Feb OTM (strike price X) with 3 x 10 = Rs. 30 credit and buy ABC Mar OTM (strike price X) with 1 x 30 = Rs. 30 debit.

  1. Is Calendar spread Vega neutral?

Now, both the values are simply extrinsic values. How would calendar spread pair react to any change in Implied volatility?

  1. Is Calendar spread Delta neutral?

This is my biggest concern. I could imagine that when spot price moves, the neutrality may be disturbed, but the sell and buy at same strike price should somehow diminish the losses/profits made on underlying price movements. Will they do it?

  1. What are the factors that work solely to create losses? What are the factors that can work in both favorable and unfavorable ways?

Thanks.

$\endgroup$
1
$\begingroup$

You should specify the underlying product. I can think of seasonal commodities where an options calendar spread would effectively be on underlyings that are very different. In that case, "What are the factors that work solely to create losses?" could be very different than, say, risks for doing a calendar in something like EURUSD.

$\endgroup$
1
$\begingroup$

Theoretically:

  1. Veta (dVega/dTime), is almost always negative, therefore, all else equal your calendar spread will not be vega neutral, the longer dated option will have higher vega.

  2. Charm (dDelta/dTime) increases delta with the passage of time for ITM options (to +-1 depending if call/put) and decreases for OTM options (to 0), it has no effect on ATM options. Therefore, all else equal your calendar spread will not be delta neutral unless both options are exactly the same in all ways except expiration and exactly ATM. charm

  3. It all depends on the specific parameters of the options you use in your calendar spread, what's favourable and unfavourable for your position depends on the net greeks of the calendar spread overall.

$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.