One way of accounting for a massive move beyond the short option strike is to consider applying a bear call in conjunction with the calendar strangle as opposed to just a short call. The premium will be slightly lower obviously than simply selling the short call (since the bear call involves the purchase of a long call at a higher strike too) however if a huge move up occurred the additional long call – above the strike of the short call- keeps the trade nicely profitable.
May 28th, 2007 at 6:33 pm
Joel,
One way of accounting for a massive move beyond the short option strike is to consider applying a bear call in conjunction with the calendar strangle as opposed to just a short call. The premium will be slightly lower obviously than simply selling the short call (since the bear call involves the purchase of a long call at a higher strike too) however if a huge move up occurred the additional long call – above the strike of the short call- keeps the trade nicely profitable.
Hope that helps.
OptionSage