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Strategies & Market Trends : Option Spreads, Credit my Debit
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To: Vol who wrote (1696)9/27/2000 12:29:23 PM
From: KFE  Read Replies (1) of 2317
 
Vol,

The SPX diagonal calendar spread you mentioned can be a very profitable strategy in a neutral market. This type of trade is by no means a "fail safe" or a win,win,win situation.

When using LEAPS you must understand the different price action that they exhibit. Using the SPX also requires that you realize the pricing differences between European and American style options. A European LEAP put that is deep ITM should be trading at a discount to parity or an interest play would be available by shorting the stock and selling the put. The further ITM you go the more the discount should be because of the carrying costs. This concept is important because unlike American options the European put that is deep ITM will not move point for point on the downside with the underlying. American puts should never trade at a discount to parity because there would be an immediate arbitrage available by buying the put, buying the stock, and immediately exercising the put.

When using LEAPS calendar spreads you must also be aware that the Delta curve is much flatter than a short term option. A large move either way in the underlying will result in a loss.

It may be easier to grasp these concepts by comparing other strike prices to those mentioned, such as those 50 points above and below and similar strikes with different expirations.

Changes in interest rates and implied volatility will also have a much greater effect on LEAPS than short term options and can possibly override the directional movement.

Regards,

Ken
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