My 2 Cents on VIX and Trading Calendars on the Upside

VIX- Just finished a teaching session and got an interesting question; why is the VIX up .30 at 14.92 with the SPX up 2.90 at 1363? It’s not unusual (thank you Tom Jones) for the VIX to be up a bit when SPX is up and the VIX is at the 14-15 level. It would be a bit more unusual if VIX and SPX were both up and VIX levels were 19-20. The answer is in the current level of the VIX, it’s cheap! Sure it might be breaking support and heading to 10, just as easily as I can be an American idol finalist. The times I have seen VIX and SPX up on the same day ( I’m relying on my memory, pretty scary), the VIX was at a very low level.

SPX- There was lamenting about May SPX expiration calendars in the same session today. Most did pretty well the previous 3-5 months, but the last 2 weeks the market has gone up fast and Implied volatility has decreased. Not a good formula for Calendar success on the upside. Here are a few tips for Calendar success on the upside. First, for those not as familiar with calendar spreads, I will use an example from one of my favorites , SPX. A few of my students put on calendars around April 19 when the SPX was at 1312. An example would be to buy 1 July 1310 call and sell 1 May 1310 call. This calendar was trading around $10. The implied volatility levels were around 13.2.Today the SPX is at 1363 and implied volatility levels are probably 10% lower. Tough combo to fight for a calendar trader, fast uptrend and decreasing Implied Volatilty.

Two Tips for Trading Calendars on the upside:

1. Monitor implied volatility of you long options, when you see a decrease of 5-7%, reduce the vega of the calendar in half. This could be accomplished by taking off half your calendar and replacing it with a short vega butterfly trade.

2. Calendars are positive theta and positive vega trades. But during the early part of the trade, Vega is king. It’s much bigger than theta. Generally in an uptrending market, I would lean a bit long deltas to help offset the debilitating effects of volatility on the upside. Market makers would say this is “ leaning into your pain”.

Stay thirsty my friend!

Dan Sheridan