Calendar Spread Myth Busters! In less than 3 minutes we bust the myths on the most misunderstood trading structure, the Calendar Spread!
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Calendars are strictly positive Vega trades.
That’s a myth. The reality is it depends. It depends on the factors that we’ve mentioned over and over again. Implied volatility and skew and how those are different. Can be different, in each cycle. When I say cycle the strike series so you’ve got a front cycle and a back cycle in the calendar right selling the front buying the back.
The behavior of extrinsic value and implied volatility and skew and the rates of change of those is going to have an impact on the behavior of that trade. So the fact that it’s a positive Vega and that we would in our analytical software and expect it to behave that way is a myth. It depends on those components whether it’s going to behave like a positive Vega trade.
Calendars get hurt when IV contracts.
Same answer. It depends. It can behave like a negative Vega trade. Oftentimes it does. Now that doesn’t mean that oh well that if it can behave is a negative Vega or a positive Vega trade that I don’t need to be aware of those parameters.
Parameters being changes in IV, back month behavior and skew. You absolutely do. You have to have that understanding in order for it to take advantage of it. To behave as a positive Vega trade or a negative Vega trade.
The overall calendar costs drive success.
Again, it depends. That’s a myth. The components that we consistently talk about drive those conditions. And the back month is a very key player in the behavior of calendars. So those kinds of, you know we call these myths, I mean how dare someone say those are myths? They’re absolutely myths! If you don’t understand those things or you believe in those statements. Those myths. You’re going to lose money in calendars. Right. So the trade behavior completely depends on those components the horizontal skew, the timing between the two strikes, you know how many days between. You put 30 days between, 3 days between, 14 days between, it all depends on what you’re trying to achieve. The extrinsic value between the strikes it’s not just about VIX or RVX it’s about the rate of change of implied volatility in play.
So hopefully this kind of gets your mind percolating around the myths and the realities of calendars.
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