Comment on Calendar Spreads

Amey commented on 12 Dec 2018, 03:51 PM

Thanks for the reply!

Now for 3SD as Stop Loss, I’ve to get the bid-ask spreads, which are mostly far from ideal, but ideally should converge on expiry.

So basically, I have to reverse the transactions that I initiated earlier. But the bid-ask spread for say DEC–>JAN is often different from JAN–>DEC (when I reverse). And I can’t put a SL on the reversal of transaction because it should ideally converge around the expiry. So I have to put the SL on the first leg but exit is based on the second leg. Further, the 3SD would be calculated on the first leg.

Example: Closing prices of TCS Futures on 12/12/2018
DEC Future: Bid: 2024.8, Ask: 2027.25
JAN Future: Bid: 2030.2, Ask: 2034.95

First Leg: Buy Jan, Sell Dec – Buy at 2034.95, Sell at 2024.8 —-> Difference: 10.15
Second Leg (reversal of first leg): Buy Dec, Sell Jan – Buy at 2027.25, Sell at 2030.2 —-> Difference: 2.95

Now the first leg difference might go from 10.15 to -20.15 (above 3 SD) but my exit would be based on Second Leg, the difference of which can be anything. So I can’t unwind the trade if second leg difference isn’t appropriately priced.

Any alternative?

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