Know Your Options

Calendars in Low IV

| Apr 4, 2016
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    Know Your Options

    Calendars in Low IV

    Apr 4, 2016

    Liz and Jenny invite James from the research team in to cover a recent study on calendar spreads.

    A long Calendar Spread combines a short option in a near-month expiration and a long option in a back-month expiration, with both options having the same strike.

    A study was conducted using SPY (S&P 500 ETF) from 2005 to present (2,666 occurrences). We bought calendar put spreads by shorting the at-the-money (ATM) put closest to 45 days to expiration (DTE) and buying the ATM put in the next monthly expiration. The trade was held until the front month expiration.

    A table of the results of the long SPY calendar spreads was displayed. The table included the percentage of winners, average P/L per trade and biggest loss. The table showed that the average P/L per trade was essentially a scratch. Since we preach the benefits of managing winners, we tested calendar spreads when managing winners.

    A second table of long SPY calendar spreads managed at 25% and 50% of the initial debit paid or held to expiration was displayed. The results showed a dramatic improvement in average P/L per trade and percentage of winners when managed. Since we also believe in selling high implied volatility (IV) and buying it when IV is low, we took the initial results and then filtered for a lower IV entry level. Those results had an even higher win rate and average P/L per trade.

    This video and its content are provided solely by tastylive, Inc. (“tastylive”) and are for informational and educational purposes only. tastylive was previously known as tastytrade, Inc. (“tastytrade”). This video and its content were created prior to the legal name change of tastylive. As a result, this video may reference tastytrade, its prior legal name.

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