Two weeks ago on February 25th, VIX closed over 19. The market then recovered from the brief sell off, and the VIX dropped back to the current low level of 12.59. I didn’t think we would be back to the 12.50 area for VIX in less than 2 weeks, after almost hitting 20. Bottom line, we are here! Usually 4-6 up days in the market and good contraction in implied volatility is a good recipe for Slightly Bearish Put Calendar Spreads.
Buy 1 April 1545 put ( April 5 expiration)
Sell 1 March 1545 put ( March 22 expiration)
Total Debit $6.35 If the implied Volatility rises 1 point and SPX (1551.18) drops to 1545 by next Thursday, this spread could be approximately 25% higher, trading at almost 8.00.
If the SPX rises Monday (March 11) to the 1560 area, I could reposition the entire spread, closer in at the 1555 strike.
What does that mean in English? Take off the entire 1545 Calendar and enter an entirely brand new Calendar at the 1555 put strike (buying an April 5 expiration and selling a March 22 expiration).
What else could I do if I’m wrong and SPX hits 1560? I could add another Calendar at the 1565 put strike and turn the single calendar into a double calendar. One advantage of SPX is that it is a European Style option (I can’t be assigned before expiration), so selling a March (22nd) in-the-money put I have no worry about early assignment. But rolling spreads or adding spreads can be commission intensive, so take that into consideration.
Have a great weekend!