« January 2018 »

IVolatility Trading Digest™

Volume 18 Issue 3
Considering Calendar Spreads [Charts]

Considering Calendar Spreads [Charts] - IVolatility Trading Digest™

Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
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With earnings reporting underway ten companies on our list in Digest Issue 1 "Volatility Kings 4Q 2017" will be reporting between now and the end of the month so it seems like a good time to take another look at using Calendar Spreads. After a brief market review we consider some of the issues involved and then offer one interesting S&P 500 Index (SPX) strategy idea from Dan Sheridan at Sheridan Mentoring.

Review NotesS&P 500 Index (SPX) 2810.30 gained another 24.06 points or .86% last week making another closing high Wednesday and then intraday and closing highs Friday. The first support is 2695, then at upward sloping trendline, USTL about 2680 followed by the 50-day moving average at 2665.57.

VIXCBOE Volatility Index® (VIX) 11.27 rose 1.11 points or +10.93% for the week while our similar IVolatility Implied Volatility Index Mean, IVXM using four at-the-money options for each expiration period along with our proprietary technique that includes the delta and vega of each option, now 8.47% added just .48 points or +6.01% shown below.


VIX Futures Premium

The chart below shows as our calculation of Larry McMillan’s day-weighted average between the first and second month futures contracts.

With 17 trading days until February expiration, the day-weighted premium between February and March allocated 85% February and 15% to March for a 6.65% premium, now below the 10% to 30% green zone.


The premium measures the amount that futures currently trade above or below the cash VIX, (contango or backwardation) until front month future converges with the VIX at expiration. At the extremes, declines below 10 and advances above 30 are both unstable.

Calendar Spread Considerations

Calendar Spreads, also called time spreads are one of the basic strategies in the toolbox often used for quarterly reporting by selling the near term option with higher implied volatility and buying the same strike price in the deferred month with a lower implied volatility. However, since this position will have short Gamma or the rate of change of delta, any large move of the underlying stock on the report date will result in a loss. As a guideline when the ratio of the Implied Volatility Index Mean, IVXM to the Historical Volatility, using the range method exceeds 2.0, the risk of a large move increases.

"Best Calendar Spread" is a regular feature in the Rankers & Scanners section of our home page. These sample suggestions are results from our Spread Scanner that is automatically set to search for long call calendar spreads by scanning for differentials between the near term implied volatility compared to the deferred month implied volatility. However, since option volume is not considered so they are simply ideas for further investigation. Calendar Spreads are always problematic since in many cases the higher implied volatility is well justified by events underway making the near term options priced correctly. Use these suggestions as a starting point and then see if the idea has merit based upon the fundamentals and other criteria including the options volume and time to expiration. In addition, since the deferred option will have greater Vega or sensitivity to changes in implied volatility make sure to check the volatility chart to compare the current implied volatility to the estimated level where it may decline after the event.

For example, Friday's "Best Calendar Spread" featured Under Armor, Inc. (UA) 12.85 scheduled to report 4Q earnings January 30 before the opening. Although not on our Volatility Kings list due to insufficient options volume it would otherwise qualify by implied volatility differential between the high and low before and after the reporting dates. With a current Implied Volatility Index Mean of 69 at .92 of its 52 week range and with a Historical Volatility using the range method of 44.09 for a modest IV/PHV ratio of 1.56 suggesting it may be Calendar Spread candidate. However, there are two things to consider. First the implied volatility is likely to continue rising until January 29. Second, after reporting the implied volatility will likely decline dramatically, last quarter it declined from 70 to 40 immediately. If this were to occur again, half of the 1.05 debit (2.15 -1.10) would be quickly lost due to the position' s long Vega.

An alternative earnings strategy is to open a Calendar Spread sometime after the report using a short option that expires before the next report date and closing it one or two days before the next report since implied volatility of the long option could rise in anticipation of the next report.

Now for another approach using Calendar Spreads to capture time decay.

S&P 500 Index (SPX) 2810.30

Concerned about long Calendar Spreads in a trending market we asked our friend and long- time professional option trader Dan Sheridan at Sheridan Mentoring in Chicago for his thoughts. He replied with an example of a trade structure that has been working for the last 5 months with the VIX at low levels in the current up trending market.

Review NotesDan calls it "The 8 Day Double Barrel Calendar Trade."

Here are the details for the trade he opened last Thursday when the SPX was around 2,800.


While he didn't give the prices for the individual legs he did say the total debit was 18 or $1,800.

"The long expiration was 22 days and the short expiration was 8 days. The foundation for the trade is the same as an Iron Condor, selling an out-of-the- money call and put (short strangle). In an Iron Condor the longs are more out-of-the money in the same expiration. In the Double Barrel Calendar trade, the long expirations are further out and with the same strikes as the shorts. This trade requires less capital than an Iron Condor and long Vega or Volatility when VIX is between 9-11, which is where VIX has been most of last 4-5 months."

"Profit Target and Maximum Loss: Looking to be in this trade about 3 trading days usually. Profit target around 7%. If the debit of 18 goes to $19.25, will have an order in to sell for $19.25 credit. If the original debit of $18 hits $16.20, would sell out of the trade for a 10% loss."

"Note: Look to enter this trade every Thursday by 11 am central. Only weeks I would not enter this trade is if SPX was up or down 1 % at time to execute on Thursday morning."

Based upon last Thursday's closing prices with the SPX at 2,798.03, using the Ask prices for the buys and the Mid prices for the sales the debit was 18.90

Since the plan is to close it in 3 or 4 days adjustments are not likely to be needed, but if they were an "upside adjustment would be to take off the put calendar when it hit the call short strike. On the downside take off the call calendar with it hit the put short strike."

Dan's 8 Day Double Barrel could also be done with SPY or converted to a single barrel 8 day trade using just OTM call or put sides reducing the debit along with any potential gain. The strategy here is to capture the faster time decay of the short options over the weekend opening the trade on Thursday and closing it on the next Tuesday or Wednesday. Take a look this Thursday.

We are delighted Dan was willing to share this Calendar Spread strategy to use in a trending market with us. Here's how to get details about his mentoring services.

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Next week we plan to focus on Foremost Indicators once again as January draws to a close.

Finding Previous Issues and Our Reader Response Request

PreviousIssuesAll previous issues of the Digest can be found by using the small calendar at the top right of the first page of any Digest Issue. Click on any underlined date to see the selected issue. Another source is the Table of Contents link found in the lower right side of the IVolatility Trading Digest section on the home page of our website.

CommentAs always, we encourage you to let us know what you think about how we are doing and what you would like to see in future issues. Send us your questions or comments, or if you would like us to look at a specific stock, ETF or futures contract, let us know at Support@IVolatility.com or use the blog response at the bottom of the IVolatility Trading Digest™ page on the IVolatility.com website. To receive the Digest by e-mail let us know at Support@IVolatility.com



Respected Sir, Thank you very much for your enlightening double barrel calendar spread article which, as instructed by you, should be done at short expiry period of options. In this case, there is remote chance for loss. You have mentioned that the volatility for this trade should be between 9 - 11. In the case of high volatility period, when the IV is greater than HV, can this strategy be used for short expiry period, though there is no record date event in the near future? With regards, yours sincerely, R.RAJENDRAN

Posted by RAJENDRAN RAJAGOPALAN on January 23, 2018 at 09:58 AM EST

Dan Sheridan replies: You can do Double Calendars if VIX is 12-14 or even higher by leaning a little more long deltas to offset the volatility risk on the upside. You can click on the online classes tab at the top of of Sheridan Mentoring and scroll down to the class on Double Barrel Calendars, that explains and illustrates this trade in great detail.

Posted by Jack Walker ( on January 24, 2018 at 02:45 PM EST

LOL-Welcome to my world- due to the terrible low vol,we have to look at debit trades and whiel I don't like calendars you can do a ton of flexible things whith them-but I trade the UK and we don't have weekly options-thankfully. I am grateful for iVolatility as the UK has nothing like you guys-apart from me!

Posted by David Eppel on January 28, 2018 at 06:48 AM EST
Website: http://optionsinvesting.co.uk

David, Thanks for your nice comment. Any reason not to trade the US from the UK? Many do, especially hedge funds and institutions. Jack

Posted by Jack Walker ( on January 31, 2018 at 06:03 PM EST

Permalink Comments [4]

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