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Mentor
It is not typically a delta neutral strategy unless you are buying it ATM. It ties up a fair bit of equity.
Other than that, it has few negatives. It can be used directionally and as a theta play. Can suffer IV crush, but usually not a big issue unless the short is very close to expiration.
They do warrant watching as the short can move faster than the long on a spike.
Mentor
I've used them as an entry to a diagonal. Let's say you were bullish on BA, but the volume is a bit scary, and the news "unpredictable". You could enter with an April215 C long and a FEB19 short. You betting directionally and if right the short decays and the long goes ITM. The delta on this is only 12, and the calendar reduces the entry by about 40%.
Not pushing this trade, just an example.
I've used it as an entry on a good trending ticker I want to have a diagonal on when it has had a pull back.
Mentor
I'm doing a test entry into energy with a calendar today on XOP. Long JUN21 77 CALL and Short 19FEB21 77 CALL. The long with 128 days to expiration is at 7.73. At 37 days to expiration the price us 3.73 right now. So almost 3X the time fir 2X the price.
Since IV is about 45%, the 9 day short is worth 1.38. If I can even get 10 shorts I make 100% if the ticker doesn't move. If it rises, the profit rises. If the ticker falls, I sell as a short call diagonal.
Thanks for this details. I will try to understand this and do a paper trail so I can see how it works in real life. Thank you
I like to only limit them to predictable, much less volatile stocks like Apple. I also usually avoid or close the short early before earnings dates as your short could end up ITM (never let them go in the money as you could get assigned and pay the dividend if it’s a dividend-paying stock). Usually target 3-4 months out for the long.
Subject Expert
You do the short 3 months out?
Thank you for the explanation. An example would be excellent. Now I am wondering what a diagonal is. I am a newbie trying to learn.
Ok got it. Thanks