Debit Calendar Spreads in Sleepy Markets
Debit Calendar Spreads in Sleepy Markets
If you aren't already aware of the historically low levels of volatility observed in 2017, then we'd like to officially welcome you, Rip Van Winkle, back from a good, long rest.
In the famous story by Washington Irving, Rip Van Winkle returns to his hometown and finds that the American Revolution has occurred, with George Washington now running the United States of America.
It makes one wonder what Van Winkle might have thought awakening in modern times, with Donald J. Trump in the White House.
While the answer to that question is highly subjective, most would probably agree that the sleep-loving Van Winkle would probably find the tranquil markets of 2017 to his liking.
In fact, Van Winkle may even have embraced the concept of the debit calendar spread, which is an options position often used by traders that think volatility will expand, but not immediately (Van Winkle fully embraced procrastination as well).
For traders that often use calendar spreads, or are considering doing so in the future, a recent episode of Options Jive will be of interest.
While you may have already experimented with the appropriate conditions for using a calendar spread, this particular episode focuses on why higher priced underlyings may be preferable when deploying such positions.
As a brief reminder, a calendar spread involves simultaneously buying and selling options with the same strike price, but different expirations. When executed for a debit (i..e cash comes out of the account), the position entails selling the closer month option, in favor of purchasing an out-month option.
Debit calendar spreads are theoretically bullish volatility because after the near-term option rolls off, the position is left with only the long premium position. If volatility expands, that position wins.
What makes this particular episode so interesting is that the Options Jive team explores why higher priced underlyings may be more suitable for calendar debit spreads.
Using examples from a range of underlying symbols (SPX, RUT, SPY, IWM, XLF, GDX, SLV, EEM) the Options Jive team illustrates that while the debit (amount paid for the spread) tends to be smaller when dealing with lower value underlying symbols, the potential profit also dips.
The problem is that as absolute profits sink, the impact of trading commissions goes up. The net result, according to this research, is that the risk-reward equation for debit calendar spreads on lower priced underlyings simply isn’t as compelling.
The full analysis, including several illustrative examples, can be accessed through this link to Options Jive.
It’s entirely possible that the debit calendar spread is the perfect choice to express your view on a sleepy, Rip Van Winkle-like market. However, you may want to run the numbers prior to trade deployment to ensure the risk is worth the potential reward - especially for low-dollar underlying symbols.
If you are looking for other approaches/strategies that might be considered during periods of low volatility, we invite you to check out this episode from the Best Practices series.
As always, we hope you'll follow up with any comments or questions pertaining to this post at support@tastylive.com, or in the space below.
We look forward to hearing from you!
Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.
tastylive content is created, produced, and provided solely by tastylive, Inc. (“tastylive”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, digital asset, other product, transaction, or investment strategy is suitable for any person. Trading securities, futures products, and digital assets involve risk and may result in a loss greater than the original amount invested. tastylive, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastylive is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparisons, statistics, or other technical data, if applicable, will be supplied upon request. tastylive is not a licensed financial adviser, registered investment adviser, or a registered broker-dealer. Options, futures, and futures options are not suitable for all investors. Prior to trading securities, options, futures, or futures options, please read the applicable risk disclosures, including, but not limited to, the Characteristics and Risks of Standardized Options Disclosure and the Futures and Exchange-Traded Options Risk Disclosure found on tastytrade.com/disclosures.
tastytrade, Inc. ("tastytrade”) is a registered broker-dealer and member of FINRA, NFA, and SIPC. tastytrade was previously known as tastyworks, Inc. (“tastyworks”). tastytrade offers self-directed brokerage accounts to its customers. tastytrade does not give financial or trading advice, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastytrade’s systems, services or products. tastytrade is a wholly-owned subsidiary of tastylive, Inc.
tastytrade has entered into a Marketing Agreement with tastylive (“Marketing Agent”) whereby tastytrade pays compensation to Marketing Agent to recommend tastytrade’s brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastytrade. tastytrade and Marketing Agent are separate entities with their own products and services. tastylive is the parent company of tastytrade.
tastycrypto is provided solely by tasty Software Solutions, LLC. tasty Software Solutions, LLC is a separate but affiliate company of tastylive, Inc. Neither tastylive nor any of its affiliates are responsible for the products or services provided by tasty Software Solutions, LLC. Cryptocurrency trading is not suitable for all investors due to the number of risks involved. The value of any cryptocurrency, including digital assets pegged to fiat currency, commodities, or any other asset, may go to zero.
© copyright 2013 - 2024 tastylive, Inc. All Rights Reserved. Applicable portions of the Terms of Use on tastylive.com apply. Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastylive’s podcasts as necessary to view for personal use. tastylive was previously known as tastytrade, Inc. tastylive is a trademark/servicemark owned by tastylive, Inc.