Yo, Pit Crazies,

Note below a not-too-bad day for the S&P 500 on Monday.

Now, while the big index was up a bit … VIX was up also.

That is usually a red flag for the rally to fail as traders load up for the coming reversal.

That for sure can happen, but Monday’s VIX rally is a bit different.

How volatility works will provide a clue.

It’s All in the Calendar Trade

Below is the term structure for the SPDR S&P 500 Trust ETF (Ticker: SPY). The very near term IV’s, or sigmas, are sky-high with volatility at the money in the 50s.

Because of forward volatility, all terms are connected to the terms in front by time.  Since both options exist for a period of time, the market has to be able to price the IV from, say, Dec. 13 expiration and a farther out term.

Below is a snap of the Dec. 13/21 forward volatility. The front term is so expensive it drives the value of the back term down. The higher the front goes, the lower the back term goes …

To correct for this, traders have to move the IV up in the farther terms or the forward vols would get too cheap and the calendars would go to nothing. And time is not worth 0.

Does that make it a good calendar? Well, the calendar would still have to pay into the massive move the market expects for SPY Tuesday. It is very hard for a calendar to pay into such a giant move.  

This kind of choice issue is what I work out for my subscribers in the New Easy Button until they learn to do it on their own.

The Rundown

SPYMaster

I am running 3-of-3 open trades for wins and seven wins in my last eight closes for.  Let’s see how the CPI number rolls..

Win the Week
Bill closed iShares 20 year T-Bond fund ETF (Ticker: TLT) Dec. 16 108/105 put verticals  for a 13% gain. He is still winning the week!

To Your Trading Success,

AG