I posted a calendar spread trade on Bear Stearns and asked for feed back on what could go wrong received some good comments (but not the answer I was looking for) what was I missing? Then it hit me. I had oversimplified the equation Option Value equals Intrinsic Value and Time Value. The Implied Volatility of BSC is so high that when I thought I was selling time value in the March Calls I was actually selling mostly volatility value. When I bot the Jan09 calls I was actually buying time value I thought pretty cheap. I knew BSC could go to zero and I was willing to take a postion that they wouldn't in 8 days. But without thinking it completly through I was betting all the time value I was paying for that they wouldn't be bought out by then either. If the deal is done and the price is set wouldn't time value for all options go to zero?
It's like I set down at a casino table and knew the dealer had 16 I thought we were playing 21 and that I had an obvious advantage. Turns out he had pocket 8's and we were playing Texas Hold'em. I may still win the hand but I really didn't know what game I was playing.
