Reverse Call Calendar Spread - Downsides?

[babymush]

The reverse calendar spread is not neutral and can generate a profit if the underlying makes a huge move in either direction. The risk lies in the possibility of the underlying going nowhere, whereby the short-term option loses time-value more quickly than the long-term option, which leads to a widening of the spread, exactly what is desired by the neutral calendar spreader. Having covered the concept of a normal and reverse calendar spread, let's apply the latter to S&P call options.

At volatile market bottoms, the underlying is least likely to remain stationary over the near-term, which is an environment in which I like to use reverse calendar spreads; furthermore, there is a lot of implied volatility to sell, which, as mentioned above, adds profit potential. The details of our hypothetical trade are presented in figure 1 below.

http://www.investopedia.com/articles/optioninvestor/02/081902.asp





What will happen if S&P futures continues to fall and Implied Volatility increases?

 

[skyasa]

I traded reverse calendar option spreads on E-mini S&P. future options are better with margin treatments compared to stock options.

I prefer selling OTM Call calendar spreads, like 70 points out of the money is better. it is not in our favour if the months of options trade involves different futures contracts.(E.g., crude oil has different prices for Sep contract vs Oct contract).

For margin purposes, i buy few extra in the front month.

Donwsides:

• 
  volatality rise
  underlying close to your strikes.

buying few extra in front month (which are cheap) helps little in case of volatality rise.

Hope this helps.