Time is on Your Side - SPX Calendars

O

optionsmaven

Like the old Rolling Stones song, in SPX calendars time truly is on your side. A client of mine suggested a strategy that seems to work very well in the weekly options. Here's the gist of it. Sell a strangle with a 100 point range between top and bottom in the nearby strikes. Cover that with identical strikes one week further out to create the calendar. Using the Mar4 and Mar5 options at 1210 for the puts and 1310 for the calls, at yesterday's close, the net debit was about 6.00 to 6.50, depending on how good the executions were. Should the market stay near the current price level, there likely will be a small profit at the nearby expiry. However, any large move, up or down, will see the out week combination of longs having a large gain in value, as the nearby strikes expire worthless. It's worth doing some analysis on. Comments are encouraged.

Good trading to all.

Josh
 
Hi Galvin,

What do say that we take a look at the positions next Friday and see how the spreads turn out before jumping to a conclusion? Fair enough?

Josh
 
Sometimes calendars work and sometimes they don't. If you are just blindly initiating calendars at the start of every week there's no edge and no reason to expect to make money on average. For any sort of calendar spread you need to know the historical volatility and the current implied volatilities. You want to sell options with high IV that is likely to decline and buy options with low IV that is likely to go up. Of course calendar spreads are directional trades as well as volatility trades so even if you're right about volatility you can still lose if the price moves too much. But if you don't pay attention to the volatility you won't have any edge at all.
 
Quote from rew:

Sometimes calendars work and sometimes they don't. If you are just blindly initiating calendars at the start of every week there's no edge and no reason to expect to make money on average. For any sort of calendar spread you need to know the historical volatility and the current implied volatilities. You want to sell options with high IV that is likely to decline and buy options with low IV that is likely to go up. Of course calendar spreads are directional trades as well as volatility trades so even if you're right about volatility you can still lose if the price moves too much. But if you don't pay attention to the volatility you won't have any edge at all.
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There is a number of way you can structure these guys, you could do them gamma-neutral in which case this is a pure forward vol trade. This is a pure vega trade and there is very little dependence on the realized vol. You better be sure you like to own that option in 1 week.

You could do it root-time vega neutral (the way OP states it), in which case you are selling gamma and protecting it with vega. In this case while you care about the absolute vol levels, what matters the most is what's vega gonna do if your realized vol goes ape-shit. I do a lot of this (on a different asset class), there I check the following
(a) is the current front implied significantly higher then recent realized (I use EW vol)
(b) what is the rank of the current front implied in N-day realized over the last year
(c) what is the rank of the second implied in the N-day realized
(d) look at regression of change in imlpied vol vs change in realized vol (in general it would be root-time or around that)
 
Why not use the SPY weeklies instead. I prefer trading SPY options over SPX options because the SPY options have tighter spreads and more competition between exchanges. A few minutes ago I got a quote on SPX110416C1300 which was 18.00 to 19.40 with one routing choice, CBOE. Then I got a quote on SPY110416C130 which was 1.92 to 1.93 with the routing choices of
AMEX
BOX
CBOE
ISE
NOM
PCX
PHLX
I understand CBOE market makers want to milk all they can out of the SPX options. They just won't get any milk from me. I know CBOE is talking about new afternoon settled options on the C2 exchange. If and when SPX options have tighter spreads, I'll consider trading them. Until then, stick with SPY options I say.
 
Quote from VoodooMMI:

I understand CBOE market makers want to milk all they can out of the SPX options. They just won't get any milk from me. I know CBOE is talking about new afternoon settled options on the C2 exchange. If and when SPX options have tighter spreads, I'll consider trading them. Until then, stick with SPY options I say.
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++++1.

Too many people come to this forum with hidden agenda.. some want to sell course, some to promote their web site or books, some to protect their firm (broker), some to target novince trader...

Slippage is the real killer in SPX. Until it get tighten and fair to retail trader, i won't touch SPX forever.
 
In the SPY vs SPX argument it's quite simple.

For the trade as a whole

If (Spread + Commissions)SPY < (Spread + Commissions)SPX
Then trade SPY
Else trade SPX

Also it depends on how likely it is you get filled quickly (enough) if you offer lower or bid higher than the existing liq providers. Don't trade either myself but I don't get why there is any argument over this, it's quite simple which you should trade...
 
Quote from galvinlee888:

The loss in slipage (nearly $0.5 to $1 for each leg) due to the in-liquidity will kill the profit easily ?:confused:
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If you are going to trade these spreads, make sure you enter them as a spread. If the order goes directly into the CBOE Complex order book (COB) the "inside market" is really very tight. Probably about .15 to .20 around fair value of the entire spread (this would be equivalent of giving up 1.5 to 2 cents in the SPY's). The problem is knowing what fair value is so you don't enter the order too cheaply. Some brokerages will route the order directly into the Cob, while others will send it to there broker first.

If you are not charged for cancels, I would enter the spread a bit high at first and then move it down until filled. If it is in the COB it will trade close to fair value (do not put the order in before the opening)
 
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