Did a calender spread on CLF bought the March$67.50puts Sold the July$67.50puts for a net credit of $3.30
Interesting play. Why did you decide to open a short Calendar vs. a long Calendar instead? You opened up for a credit, but margin requirements and capital is still significantlly tied up. When you sell the deeper expiration month (ie July), the brokerage house usually requires you to cover 20% of the underlying on that leg, even though you are long the March (which requires a debit to open that leg).
Also, was there a directional bias? If you are bearishly biased, then the PnL graph gives you some reasoning behind the short Calendar, but if you are bullish, you should have gone long on the Calendar on it. See the attached PnLs.
Third, typically a Calendar spread is a time erosion position, by selling the front month when theta is known to accelerate and going long on the deep month because of lesser degree of time erosion. Also, the IV on the March 67.50 is 53.73 and the IV on the July 67.50 is 41.85. So, not only are you having greater erosion of the premium bought (March) vs the premium sold (July) due to the net Theta, but you actually bought the higher IV option and sold the lower IV option, paying more for the premium than that of the option you sold.
Here is a PnL at expiration (3/17) on your position...
Note that the overall position has a Net negative Theta, which means that time erosion has a negative effect on the overall position. I put 10 contracts in each leg to get numbers. Your position is probably different. Also note that the Net Vega is also negative, so if Volatility goes up, it hurts the overall position. Maximum loss on a 10 contract position would be >-$3,000 at expiration when CLF is at $67.50. Maximum profit is near $2,200. Clearly this position is a bearish position, but you have time premium working against you.
The next PnL is a typical long Calendar spread at the same position...
In this position, due to the strike set (67.50) with the underlying near $60, this is a bullish directional Calendar. Now, the position has a Net positive theta, which means that time erosion works for you. The Net Vega is also positive, so a spike in volatility will help the position. In this position, you are also selling the higher IV leg (March) and buying the lower IV leg (July), so you are capturing more premium with the time erosion. The overall position is a debit, but it actually takes less capital to open up this position. It would take $3,300 in capital. Your position would require a debit on the March leg and margin requirements on the shorted July leg, which would be much greater than in amounts. The long calendar position has a maximum profit of $3,300 and a near maximum loss of less than that.
If you have a bearish bias on CLF, I think it would have been better to open up a long Calendar with strikes in the 50's, rather than a short Calendar at 67.50. You also could have sold a OTM Bear Call spread.
I just don't like short Calendars because not only do you have time erosion working against you, you are also buying all the volatility, and even though on the surface it is a credit spread, in reality, it ties up more capital than a long Calendar with less potential gain.
Thoughts?
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