What is wrong with my thinking here?

happyd said: "Hi, Could someone please tell me what is wrong with my current thinking on this trade. It is too simple to be correct!!! 1. Buy very long dated very deep in the money call option 2. Sell short dated very deep in the money call option at same strike as 1 (say one month to expirey) 3. Close when 2 expires - Both options are deep in the money so have delta = 1.0 and gamma = 0.0 ( or v close) - Both option will always have same intrinsic values, but have different time values - Cost of doing trade, is (ignoring commisions etc.) long option premium - short option premium = long intrinsic value + long intrinsic value - short intrinsic value - short time value = long time value - short time value - At short dated option expirey, sell them both proceeds = long option time value - short option time value (which is zero) = long option time value - Net PnL = long option time value after one month - long option original time value + short option original time value - Since time value decreases *much* faster when option close to expirey, the short option will lose more time value in its last month than the long option in the same month when it has long time until expirey. - Therefore long option time value after one month - long option original time value > short option original time value - Therefore guarenteed positive PnL I hope this makes sense - and thank you in advance for your help. Regards, happyd"

MSCantrell said: "[QUOTE=happyd]Hi, Could someone please tell me what is wrong with my current thinking on this trade. It is too simple to be correct!!! ....Therefore guarenteed positive PnL [/QUOTE] I belieeeeeeve... that the problem with this is, you're ignoring the intrinsic value of your long option. Yes, it has time value. But it's got intrinsic value, too, and like you mentioned, when deep in the money, delta is very low, so the intrinsic value follows the price of the underlying security basically 1:1. So if the price of the underlying security goes DOWN, then the intrinsic value of both your long and your short positions go down. When the loss in the value of your long option exceeds the premium you received on the short option, then you're in losing territory. A calendar spread, like other spreads, still has a profit range, a loss range, and a breakeven point. Hope that helps! Mike"

rrvball said: "The other big error in your thinking is your assumption: [QUOTE]- Cost of doing trade, is (ignoring commisions etc.) long option premium - short option premium = long intrinsic value + long intrinsic value - short intrinsic value - short time value = long time value - short time value[/QUOTE] Commissions, etc (the etc includes the difference between the bid and ask prices) will significantly affect your theory and your profits."

dannyboy990 said: "Remember also that deep into the money are not that liquid!! [URL="http://www.israelispeculator.com"]option trading[/URL]"