Delta is net negative only because of very high volatility (and hence high delta) of deep otm calls - 65% vs about 42% for atm calls. If you use flat volatility then delta is actually positive (which is why you make money if it goes higher).
So here one makes money by volatility decrease and by positive real delta (assuming flat vola). Two combinations is your favor and if you are totally wrong about direction you still make money as you got credit to start with.
However only problem is by the time you get this kind of opp is vola sky high and most of us - option sellers - are naked options in wrong direction (me too) and does not have lot of margin available or desire to increase naked positions....
However if one has margin available then it gives about 14% return in a month with good probability.
The following 2 users say Thank You to seemasp for this post:
Your probably better at estimating that than me.
If they do take it up to $5 though I would think it would be a decent spike.
It will probably be irrational, but can people stay solvent longer than the market stays irrational.
This spread can lose money and actually lose lot of money once price goes beyond 600. Also it can lose money if volatility goes even much higher and price goes up very rapidly. There fore one has to stick very firmly to liquidate the spread around 5.70-5.75 either by taking loss or profit whatever market gives. Above that price it becomes a ticking bomb...
Obviously there is risk there (and for some lot of risk) but without risk there won't be any return...
The following user says Thank You to seemasp for this post:
Say the NG futures priced rises 1.10 in 30 days (the lowest Feb call that I can use to get IM is 3.15). That takes it to 5.60. So I use a 3.15 Feb long call and a 4.90 short Feb call X5 to compare the 4.25-6 spread with a 1.10 rise in 30 days. But that does use the same vol and skew as current. That may be true or it may not be true.
The IM on a Feb 3.15-4.90 spread is 2874 and the IM on Mar 4.25-6.00 is 747. So it went up 2127.
The long call made 9140 (13180-4040). The short calls lost 1600 (4400-6000). Net 7540. This easily covers increased margin.
Say futures went up 1.50. That takes it to 6.00. I can't figure margin here but I can figure premium. Using Feb 2.75-4.50 calls, the long call made 13130 (17170-4040). The 5 short calls lost 6600 (4400-11000). Net up 6530. So at about this point the profit is just about covering margin increase. So no cash excess required to cover to this point.
Say futures went up 2.00. That takes it to 6.50. I can't figure margin here but I can figure premium. Using Feb 2.25-4.00 calls, the long call made 18130 (22170-4040). The 5 short calls lost 20800 (4400-25200). A net loss of 2670 for premium.
Of course this is assuming that margin at NYMEX doesn't increase. Which it probably would. But IM only increased by 12% last May on the price increase (+.80 over 2 months).
Say futures went down 1.10. The Feb 5.35-7.10 spread IM is 220. So IM dropped from 747 to 220. The long call lost 3390 (650-4040). The short calls made 3950 (4400-450). Net profit 560 with a 527 drop in IM.
I still say we don't get over 5.00 unless we have record cold for Jan.
The following 2 users say Thank You to ron99 for this post:
I think we will go very close to or above 5.00 to flush out all shorts - 5.00 may be max threshold of pain for most of the shorts and market often goes to those points and then return...Personally I hope it never goes there but there is great deal of momentum right now...