BY ANDREW GIOVINAZZI

July 27, 2023

Yo Pit Crazies,

Mark and I set up some complementary call calendar spreads on the Trading Desk on Tuesday only to close them for 40% plus gains on Wednesday afternoon. I was in on the left red arrow and got taken out on the right red arrow after the big spike.

A call calendar is just short a front month option and long a back month option. There are better times to do them since they are volatility trades.

When’s a good time to place call calendars?

Calendars Work Better When the Volatility is Favorable

The snip below has the Jul26 and Jul28 implied volatility show for the SPDR S&P 500 Trust (Ticker: SPY). Note the Jul26 was down 6.5 points and the Jul28 was down 2.55 points on the close Wednesday.

Volatilities per term can move independently but are connected by Forward Volatility. That’s the difference between the Jul26 and Jul28 expiration dates normalized for the difference in time to expiration. The easy way to think of it is just the “net vol cost” of the Jul28 cycle in this case.

In the Trading Desk, I used one of our Time Spread Edge Hunter sheets to calculate the cost of the time spread. It had the Jul28 cycle for around an 11.1% cost. Note the Jul28 closed around 11.96 sigma, or average for the term. The reason why it worked out was because the Jul26 dropped so much. The time spread buys Jul28 and sells Jul26.

I closed the short side once the price collapsed on Wednesday and had a standing GOOD TIL CANCEL order in for the Jul28. The trade filled on the rally.

So the Fed stayed the course and raised rates and said the economy was producing moderate gains. VIX is headed back to the 12 handle. This could make for a very slow August but some exciting bullish action.

We will discuss how to place calendars with an edge on Monday in the Trading Desk. I hope you will join us!

To Your Trading Success,

AG