jaytee,
Your query caught my interest, and led me to a new
appreciation for these calendar spread. I've always been
concerned about the "what if I get called out?", but never
realized how much profit potential there can be with that
scenario until I built a little spreadsheet to help me
compare the JAN25 with the JAN30 buys to go with the OCT40
write.
Here is the output, assuming you get called out, for all
combinations of JAN buys (going down) and OCT writes (going
across) expressed as the return on the initial debit to open
he position based on the current premiums.
Strike 17.5 20 22.5 25 30 35 40
Strike Premium 17 5/8 15 1/2 13 1/2 11 3/4 8 7/8 6 1/2 4 1/2
17.5 19 1/8 -100% -31% -11% 2% 22% 39% 54%
20 17 1/8 -100% -31% -7% 21% 41% 58%
22.5 15 3/8 -100% -31% 15% 41% 61%
25 13 7/8 -100% 0% 36% 60%
30 11 1/8 -100% 8% 51%
35 8 3/4 -100% 18%
40 7 -100%
To calculate each data point, the % return is the OCT strike
plus premium received, minus JAN strike plus premium paid,
divided by the net premium debit. So for the 40/25
combination it is (40+4_1/2-(25+13_7/8))/(13_7/8-4_1/2)=60%.
The table shows that the JAN25 is better than the JAN30, as
you thought it would be, but not by a huge percentage.
If you look at the potential return when not called out
(amount the JAN closes in the money less the debit, divided
by the debit), if the price at JAN expiration is 42_1/16 the
% return is about 80% for either the JAN25 or the JAN30. If
it closes higher the JAN 30 is better; at 50, the JAN25
returns 167%, while the JAN30 returns 202%. If the price at
JAN expirations is below 42_1/16, you are better off with
the JAN25. So the answer to the question of which is better
depends on where you think CAMP is likely to be in JAN.
At least now we know where the threshold is.
I would certainly recommend you check my calculations for
yourself. I just created the sheet, and although it looks
right, it has not been thoroughly tested. I haven't looked
that carefully at the tools Herm has available, but I would
not be surprised if he already has something similar.
WHY DOES THE "CROWD" WANT THE 30'S INSTEAD?
I doubt the difference between open interest of 5 and 103 is
ever of much significance, but in this case it happens that
100 of the 103 was a crowd of 1 making a move; two blocks of
50 contracts sold at the same time on June 13.
Dan |
