Calendar Options Strategy Video Series 4 of 7
In this calendar options strategy class we explain how the Calendar can behave as a negative Vega trade. This is very important to understand. Many option traders do not understand volatility well enough and believe this type of trade always makes money when vols rise and it always loses when IV drops. However, this is far from the truth. The calendar spread can be used to make money when IV drops just as effectively as when it rises.
Welcome back everybody! This is Morris from San Jose Options. In this lesson on the Calendar Spread, we’re going to talk a little bit more about income calendars. It’s different than the earnings calendar and that debacle calendar. This one we call income.
The income calendar, we’re actually looking for more of a positive moving volatility and to take advantage that the calendar truly is a positive Vega spread. This one here, again in this type of calendar, we’re looking for a rise in volatility. Not a fast, this is the key right here. Not a really fast move in the volatility but more of a gradual increase. You want this type of reaction. You want to have, let’s say this is your graph in volatility and you’re going through your trends and maybe you’re down here. Let’s say the VIX is really low, and then it starts to move up. But we don’t want that type of move. That type would be a different type of strategy. We just want the vols just to kind of go up like that, just kind of a steady increase in volatility. This type of reaction with volatility can work really well for this, what we call the income calendar.
If we get this type of incremental increase in volatility through time, then typically your front month and your back month will move up at a more even pace. You’ll have the front month going up like this and then the back month, there’s always going to be a little bit of triangle shape that forms as you go through time but it’ll be more even. The last one we’re talking about the debacle style, you’re going to have this type of reaction where farther on time, it’s just going up a little and the front month goes up way faster. But if your volatile is increasing slowly, then every month moves up at a more even pace. That’s what makes the calendar work and this is the type of trade that would be appropriate for a positive Vega and for this type of calendar which is more like an income calendar. This is kind of the traditional way that you would use this particular strategy.
Number 2 here, just remember that the calendar, although we’re talking a lot about the volatility of the trade, it’s a narrow spread. You’re looking at a type of spread that maybe 45% probability, not much. It’s pretty narrow. You really need the underlying right here that doesn’t move too much. So you need to time that volatility the bet you can and also find the right product that doesn’t move around too much.
Thank you very much! This is Morris from San Jose Options.