The calendar spread

TheBigShort

TheBigShort

As I attempt to learn how to trade the term structure, a lot of my research topics are on calendar spreads. I have found a few good articles on how to trade them. But 99% of people who are advocating to trade these spreads have NO clue how to use them.
"They are good for income"
"You use them when you think the market will stay in the same spot"
"Good to put on when volatility is low"

If you would like to discuss trading the term structure and calendar spreads, I thought I would make a thread on relative value strategies with calendar spreads. They offer a great risk/reward and I think is essential in any traders tool kit.

I still have a lot to learn on trading the term structure and will post my research and any interesting trades. Those who have experience with trading the term structure plz chime in.
 
OptionsOptionsOptions said:
Pre-earnings trade

  • Sell expensive pre-earnings option close to expiry.
  • Buy the same strike option further to expiry.
  • You end up with a relative cheap entry for a directional trade.
More...

hmm.. but what if the back month is pricing a $10 move and the front month is pricing a $8 move? I don't think you can look at a calendar spread like that. I can't imagine how they should be used for direction. The way I see it is: "Front month vol is unusually high for not a very good reason, maybe I should initiate a calendar." Then take profits once the term structure normalizes.
 
What is meant by selling term structure?
Screen Shot 2018-06-07 at 7.40.52 PM.png
 
Im also trying to find what the "normal" slope of the curve should be between expiries. For example if front month vol increases by 10% then the second month should increase by 10/sqrt(2). IF it does not a trade can be initiated however we are assuming the term was properly priced before. What if it wasnt???
 
There are several ways to judge the fairness of the current term structure, either based on historical relationships of implied to implied, implied to realized or implied to related assets. I think @sle had posted something about, but I am too lazy to search.

PS. I assume you are reading the Colin Bennett’s boo - his section on trading term structure is a bit misleading
 
Markets strive to be efficient. Larger markets are most of the time.

If a calendar spread looks too far out of whack, it might be good to try to understand "why"-- and see if you "have good reason" to disagree.

I have no experience in calendar spreads and I am offering this additional way of looking at things for discussion and critique, in an attempt to learn and perhaps maybe add value.


The Big firms are always searching the past, looking at the math, and running simulations.

They try to understand the "why" of the situation as well.

________

Example of my thought process in a separate area : Years ago I had a very large private bet that Party Poker stock, trading in England, would crash. I did not have immidiate access to the exchange Party was on.

I had strong reason to believe a US anti online gambling bill would pass in the US, forcing Party out of the country. Most people thought the bill was a substantial underdog to pass, and/or they gave no thought to the corelation.

* situations like this, in my life, have not grown on trees, or at least so I can see them.
 
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Secret Santa said:
There are several ways to judge the fairness of the current term structure, either based on historical relationships of implied to implied, implied to realized or implied to related assets. I think @sle had posted something about, but I am too lazy to search.

PS. I assume you are reading the Colin Bennett’s boo - his section on trading term structure is a bit misleading
More...

I am reading collin bennet. How long does it usually take for the market to correct for root time?I have also looked into SLE's collection (that is usually where I start my research) and it seems he must be keeping the secrets of the term structure to himself. Whatever happened to that guy anyway? Rumor has it he bought a greek Island and became subject to polygyny..
 
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