Calendar spreads: Some questions

General
1

​​Imagine,

  • I sell Nifty Feb OTM (strike price 7200): 3 x 10 = Rs. 30 credit
  • I buy Nifty Mar OTM (strike price 7200): 1 x 30 = Rs. 30 debit

Now,

1. Is Calendar spreads Vega neutral? 

Now, both the values are simply extrinsic values. So any raise/fall in Vega should made neutral right? Can I believe this set up is Vega neutral?

2.  Is Calendar spreads Delta neutral? 

This is my biggest concern. I could imagine that when spot price moves, the sell and buy at same strike price should nullify the effect. Will they do it?

3. Is Calendar spreads Theta positive?

I am sure enough about this one as theta should be declining for the near month faster than the farther expiry month.

4. What are the factors that can create loss in this strategy?

Thanks.

2

  1. As volatility effect on near month contracts is higher than next month,vega is not nullified but will be negative in your case.

  2. All calendar spreads are not delta neutral but it depends on how many contracts one is using to initiate a calendar spread.

Even if one could able to manage to initiate a delta neutral position soon it will deviate from delta neutrality and rebalancing is often required and called as dynamic hedging.For retailers to do dynamic delta hedging is impractical.

  1. At initiation as in your case it is theta positive.

  2. If the underlying went against you in quick time then the strategy will end up in big loss compared with the reward one is expecting from this.

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