Here at tastyliver we love to sell premium. Some of our favorite strategies for doing so are short Strangles, short Straddles, Iron Condors and Credit Spreads such as Vertical Spreads. They take advantage of Theta (time decay) and have a solid probability of profit (POP). Unfortunately for us, these trades work best in high Implied Volatility (IV) environments and as would be expected after a strong move higher in stocks, IV has declined and finding an underlying with a high IV Rank (IVR) is difficult. Can we find an opportunity in Calendar Spreads and if so, which ones would be best? TP described a Calendar spread “as a positive time decay strategy that's long Vega.”
Our Study was conducted in the SPX (S&P 500) and RUT (Russell 2000 Index) using data from 2005 to August 2016. We filtered for instances when IV Rank was below 25. We simulated purchasing a Put Calendar Spread everyday. We bought the 60 days to expiration (DTE) 40 Delta Put and sold the 30 DTE same strike Put. We then compared either holding to expiration, managing winners at 10% of the debit paid (10% Return on Capital (ROC)) or managing at 25% of the debit paid (25% ROC).
A results table of RUT Calendar Spreads when IV Rank was below 25 was displayed. The table included the average P/L, success rate and average trading days held. The table showed that managing at 10% of the debit produced the highest success rate and lowest number of days in the trade. A second results table of SPX Calendar Spreads when IV Rank was below 25 was displayed. The average P/L, success rate and average days in the trade were much better than that of the RUT. A table comparing the average ROC of a 1 Standard Deviation Strangle in the SPY and managed at 50%, to the average ROC for RUT and SPX Calendars when IVR was below 25 was displayed. The table showed that the Calendar Spreads had a higher ROC when IV was low.
For more on Calendar Spreads see:
Market Measures from December 30, 2015: "Calendar Spreads | A Hedged Strategy"
From Theory To Practice from April 14, 2016: "Strategy Session: Calendar Spreads"
Best Practices from April 27, 2016: "Calendar Spreads"
Market Measures from September 12, 2016: "S&P 500 Index: Put Calendar Spreads"
Watch this segment of Market Measures with Tony Battista, Tom “TP” Preston and James from our research team for the valuable takeaways and the results of our study on buying Index Put Calendar Spreads in low IV, managing early and the positive results that follow.
This video and its content are provided solely by tastylive, Inc. (“tastylive”) and are for informational and educational purposes only. tastylive was previously known as tastytrade, Inc. (“tastytrade”). This video and its content were created prior to the legal name change of tastylive. As a result, this video may reference tastytrade, its prior legal name.