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 Calendar spread : the delta ∆
Issued on August 24 2010 par Strategies-options.com
The calendar spread is an (almost) symmetric strategy. It thus has to be translated in the delta ∆.
The short calendar spread is a strategy which allows to generate profits or losses with strong movements.
Indeed, when the calendar spread is sold, he allows to earn money in case of sharp increase or of strong decline and is losing if the underlying stays steady. On the contrary, if we buy a calendar spread, we lose money in case of strong movements of increase or decline and we earn money in case of stability of the spot. It is thus volatility bet strategy. If we think that an underlying is going to move, it is necessary to sell the calendar, if we think that it is going to remain on the same area, it is necessary to buy the calendar. I - Example of a "Long" call calendar spread Graphically, for a long calendar spread 1 year / 6months, this leads to  Selling a calendar thus presents resemblances with a purchase of straddle or strangle. Buying a calendar is something alike the sale of straddle or strangle. It is a relationship which we have to find in the study of its delta ∆. Le delta ∆ :  II - The impact of spot moves on delta ∆ We find well a symmetry. The delta ∆ is negative for the values below 100 that suggests a valuable taking in case of decline; it is positive for the values above 100, we have then a valuable grip(taking) in case of increase. It is to note that the delta ∆ does not increase all the time in absolute value. We notice that in extremes, the delta decreases in absolute value. It is translated by the fact that the calendar spread gets bounded gains to extremes. III - Time decay on the delta ∆ We notice that time makes appreciate itself the delta in absolute value for a wide range of spot.it reaches extreme and opposite values when around the strike. It is due to the fact that when the term arrives, the sold option becomes either in the money or out its delta is either 100 % or 0. As the delta of the long option is around 50 % around the strike, the global delta varies between 50 -100 % =-50 % and 0 % + 50 % = + 50 % Next : Iron Condor: A First Approach Previous : Calendar Spread Download the pricer here Advanced Strategies - INDEX Advanced Strategies - CHAPTER I Advanced Strategies - CHAPTER II Advanced Strategies - CHAPTER III Advanced Strategies - CHAPTER IV Advanced Strategies - CHAPTER V Strategies-options.com |
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