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Calculating Breakeven on Calendar

Discussion in 'Options' started by Jay Hattler, May 30, 2016.

  1. Jay Hattler

    Jay Hattler Well-Known Member

    Does anyone know the mathematical formula for calculating the breakeven prices for a calendar? I would like to include it in a spreadsheet I am developing, but can't figure it out. (I assume the breakeven should be calculated at the expiration of the front month.) I tried to deduce the formula by looking at a calendar using OV. You can see from the attached images that OV puts the breakeven for the low-side of the calendar at 2119. The second image shows the breakeven of the front month at 2117. The third image shows the breakeven of Day 4 for the back month (Day 4 is the expiration day of the front month) as 2116.

    So: 1) is this the right approach; and 2) can anyone deduce the formula if it is the right approach?
    Jay
    2016-05-30_11-21-36.png 2016-05-30_11-28-33.png 2016-05-30_11-29-45.png
     
  2. stevegee58

    stevegee58 Well-Known Member

    The breakeven on spreads where all the legs have the same expiry is easy and can be done on a calculator. For a calendar it's not so easy. The best you can hope for is to model it like you're doing with the understanding that the BE points will move around with changes in market conditions.
    In other words there's no firm answer to "what is the breakeven of a calendar spread".
     
  3. ACS

    ACS Well-Known Member

    Modeling options that expire a week or two apart will tend to be easier than options that expire a month or more apart. The farther apart the expirations, the more the volatilities will change. There are some good discussions on weighted Vega available in the library that will explain the concept.
     
  4. Jay Hattler

    Jay Hattler Well-Known Member

    Thank you to both of you for your guidance. I have viewed Ron's material on weighted vega and am still trying to wrap my head around it.

    Jay
     

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