Gauging likeness of two options

Lakshya · Post by **Lakshya** » Wed Oct 28, 2015 7:25 pm

Hello all, I hope this is the right place to ask this question. As I learn more about options/trading I come across the phrase like options, which I was interested in learning more about. On some level it makes sense, in a $30 stock a 33 strike call option expiring in 6 months and a 32.5 strike call expiring in 6 months are very like options and are good hedges for each other, but I was wondering if there's a more systematic way of thinking about? What's the relationship between say the ATM call expiring in 3 months and the ATM call expiring in 4 months lets say. It's stock dependent, but at some point, if the 4 month ATM is trading a certain spread above the 3 month ATM, you would trade it right? How do you gauge the likeness of those two options? If therse's not a systematic answer, how would you advise to learn more about it/are there books you would reccomend.

I read Volatiility trading by Sinclair, and he used the phrase "Closeness" and related it to the moneyness which makes sense if the options are in between teh same month, but wht about if they're in say different months? Or on opposite sides of the skew?

TakeItAndRun · Post by **TakeItAndRun** » Wed Nov 04, 2015 8:49 pm

The straightforward way :

One could think in terms of risks: interest rate, delta, gamma, vega, exercisability,…

The intuitive way:

Based on strategies and scenarios: being given this calendar what will be its behavior in case of a specific scenario (underlying, volatility) knowing the prices of ATM strangles and synthetics…

filthy · Post by **filthy** » Thu Nov 05, 2015 9:03 am

i never really figured this out.

i just made a composite score out of the headline greeks and added an arbitrary (in retrospect) penalty for calendar spreads.

calendar risk has always been the toughest for me.

cygnet · Post by **cygnet** » Thu Jan 14, 2016 10:56 pm

You could look at the recent realised variance of the spread position you're thinking of getting into.

iasmath · Post by **iasmath** » Thu Jan 28, 2016 2:16 am

Not a systematic answer.

- Dates matter: what events/data you have on the extra month (considering 3m ag 4m)

- Risks matter: is gamma (buy the shorter sell the longer) better bid or offered? Is mkt full loaded in a given bucket, say 3m, so it is good to spread risks by reducing vega on 3m while increasing in 4m?

- Moneyness matter: a 25-delta strike in 3m is different than in 4m, though it would be a small diff in a such a small time distance (it dependes on interest rates).

- And so on...

I am not aware of any book as I think it is a practical stuff. If calendar spreads are wild, yes you trade it trying to get some profit. But they are wild for a reason, and it can move against you just like any other trade. In the end, it is risk/return + demand/supply as usual.

dd4nyc · Post by **dd4nyc** » Thu Feb 18, 2016 4:42 pm

You can try using d1 as similarity metric - log moneyness over total vol. Distance between d1 s of different options will tell you how dissimilar they are. It has some nice properties, such as penalizing short-term calendar spreads more than long-term calendars. However this is quite theoretical; both filthy and iasmath point to practical limitations of doing anything like that.

@cygnet IMHO that would be too noisy if calculated from historical data.

fomisha · Post by **fomisha** » Mon May 09, 2016 7:33 pm

after delta hedging:

the pnls of two options with |d2_1-d2_2| >>1 are not correlated

the pnls of the options with T_1>>T_2 are not correlated