Ended up taking some positions today, but with a modified setup. We have done setups where:
- short leg is this week (0 weeks out) and long leg is 1 week out; let’s call this 0-1
- short leg is this week, and long leg is 2 weeks out; let’s call this 0-2
We have talked about not playing this in the first half of the week, because the IV crush of the long leg seems to be sufficient enough to make returns minimal. Well, we also know that the leg 2 week out doesn’t really have much of this happening. Could the IV crush on the 1-week leg be sufficient to provide greater margins when paired with the 2-week out leg? We’re about to find out.
The other interesting thing - the premium is much less than the 0-1 and 1-2. For BP for example, premiums are:
- 0-1: $0.32
- 0-2: $0.51
- 1-2: $0.20
No such thing as free lunch, so I’m curious where I get hurt. Also… would have been good to paper trade this first, but was at work and 30 mins before market closed… will dig into this more deeply in a bit.