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2012issue C0841

Executing conversion and ratio calendar option packages

Treat every multi-leg ticket as a cash-package construction problem. First classify the book as an inventory conversion or reversal, or as a calendar-spread or ratio-calendar, then rebuild the displayed bid and ask from the legs so the quote is a summed debit.

  • Classify the book first as an inventory-style conversion or reversal, or as a calendar-spread or ratio-calendar, then rebuild the package quote from the legs.
  • Conversions and reversals are nondirectional arbitrage packages, not risk-free positions. Their economy depends on margin treatment, commissions, and financing rates.
  • A conversion can warehouse long stock so later long-delta hedges do not require shorting an illiquid or hard-to-borrow underlying.
  • A one-to-one calendar midprice is a summed debit of the legs. A ratio-calendar is those calendars plus leftover back-month contracts, and that total is read against the displayed package quote.
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Current trackOptions calendar spread30 readingsOption spread138 readings

Editorial frame

Editorial: treat every multi-leg ticket as a cash-package construction problem. First decide whether the book is inventory-style, a conversion or a reversal, or a calendar-spread or ratio-calendar. Then rebuild the displayed bid and ask from the legs so the quote is a summed debit, not a mysterious market.

Inventory-style conversions and reversals

A conversion holds long stock against a same-month, same-strike short call and long put in equal size. A reversal holds short stock against a same-month, same-strike short put and long call. The same-month, same-strike call-and-put pair is the synthetic stock inside either package.

Conversions and reversals are nondirectional arbitrage packages, not risk-free positions. Three-leg packages are typically used for inventory, dividend-change exposure, or standing on the other side of customer flow, not as a hidden directional fortune.

Whether those packages are economical is governed by margin treatment, commissions, and financing rates, sometimes measured in a fraction of a cent and mainly relevant to the largest accounts. A conversion can warehouse long stock so later long-delta hedges do not require shorting an illiquid or hard-to-borrow underlying.

Rebuild a calendar-spread from the legs

A calendar-spread is a same-strike package that buys a later-expiry option and sells the nearer-expiry option. With July 20 calls quoted 0.80-0.90 and August 20 calls quoted 1.10-1.20, the one-to-one calendar midprice is 0.30 and the two-sided calendar market is 0.20 bid / 0.40 offer.

Five one-to-one calendars at a 0.30 midprice produce a 150 debit because the quoted prices are per contract.

Read a ratio-calendar as leftover exposure

A ratio-calendar is a calendar in which the number of long back-month contracts differs from the number of short front-month contracts, leaving residual directional exposure. A +5/-4 ratio calendar is four one-to-one calendars plus one leftover long August 20 call.

Using the same mids, four calendars cost 1.20 and the extra call costs 1.15, summing to 2.35, which sits inside the displayed 1.90-2.80 package market. Editorial: compare that reconstructed debit with the displayed package quote rather than treating the screen market as a unit price.

Educational research material, not investment advice. Historical source context does not establish present-day performance.
15 of 21 in the Options calendar spread track
201550-50 pp.Next on Options calendar spreadNear-expiry options on new-crop grain futuresRemaining option life and the chosen harvest futures month are separate choices: one sets how much unused time sits in the premium, the other sets which crop cycle the price view tracks.
All readings on this track · 21 readings
  1. 1994Competing-bid calendar spreads and implied volatility
  2. 2001Calendar spreads as range overlays with wing repairs
  3. 2002Covered-call premium budgets and calendar-style rolls
  4. 2002Calendar-spread construction from time decay and implied volatility
  5. 2003Calendar ratio backspread construction for range and breakout regimes
  6. 2005Read the implied-volatility regime before calendar-spread assignment
  7. 2005Constructing calendars and straddles around implied volatility
  8. 2005Short option coverage through calendars, rolls, and expiration
  9. 2006Calendar spread expiration, assignment and time skew
  10. 2008The two clocks that close a calendar or a stock-plus-put
  11. 2010Cheap back-month implied volatility is a regime question, not a shopping rule
  12. 2010Calendar-spread assignment as a volatility regime shift
  13. 2010Uncapped collar overlays and earnings-week short calendars
  14. 2011Sequencing verticals, straddles, and calendars as construction tests
  15. 2012Executing conversion and ratio calendar option packages
  16. 2015Near-expiry options on new-crop grain futures
  17. 2018Calendar spreads as range and volatility regime trades
  18. 2019A directional put calendar after a failed resistance breakout
  19. 2019Sizing short-option risk with calendar puts
  20. 2019Limited-risk reversal construction
  21. 2020Covered-call writing versus a calendar call diagonal
By fieldOptions and volatility435 readingsBy year2012165 readings
All 30 readings tagged Options calendar spread
Also on Options calendar spread5 readings
1994Competing-bid calendar spreads and implied volatility2001Calendar spreads as range overlays with wing repairs2005Short option coverage through calendars, rolls, and expiration2010Calendar-spread assignment as a volatility regime shift2010Modified butterfly and calendar spreads in high-priced names