Click here for a link to the thinkscript.
To install the thinkscript on your thinkorswim platform, please follow the steps below (or watch a video on how to do it here):
1) Go to 'Charts' tab
2) Click on the "Studies" tab…same line where you type in the ticker same symbol, on the right hand side)
3) Click on "Edit Studies" and then "New"… Lower left hand corner
4) Delete everything in the box. (plot Data = close;)
5) Paste the entire code listed below
6) Name the study 'tastylive_calendar'
7) Click "OK"
8) Click "Apply"
9) Click "Ok"
Our experience and our statistical work tells us that Implied Volatility (IV) is mean reverting. We also know that Calendar Spreads benefit from any rise in IV. Since IV is currently at extreme lows is this the time to buy Calendar Spreads? Why do Calendars benefit from a boost in IV and how does Vega come into play? Michael Rechenthin, Ph.D., aka Dr. Data, the head of our research team, joins the guys to help explain things using the graphical tools of Data Science and provides a thinkscript tool that can be added to your thinkorswim platform which you should find useful.
A graph of the P/L for Calendar Spreads in the OIH (Oil Services ETF) was displayed. The graph showed that because Calendars are long Vega, increases in IV resulted in increases in the breakevens and profits in the Calendar Spreads. A table of the at-the-money (ATM) strikes, expiration month and the Vega was displayed. The table demonstrated that by selling the front month and buying the back month (long Calendar Spread), a trader establishes a net long Vega position and benefits from increases in Implied Volatility.
When we get long Calendars we want IV to be near year lows, yet also have a substantial range in the underlying over the past few months. The Oil Services ETF (OIH) currently fits these criteria. Mike reviewed how we calculate Implied Volatility Rank (IVR). He reminded us that the segment of Skinny On Options Data Science on November 12, 2015: “IV Rank and IV Percentile” explained this. He then showed how we solve for IV given a projected IVR (in this case 25%). Dr. Data then explained how to use the thinkscript tool to solve for Vega’s impact on the resulting change in IV based upon IVR.
Watch this segment of The Skinny On Options Data Science with Tom Sosnoff, Tony Battista and Dr. Data aka Mike Rechenthin Phd., for the important takeaways and an “absolutely awesome” tool that makes calculating what a rise in IVR will mean for your long Calendar Spreads, incredibly simple.
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