If you have read or listened to anything produced by Option Pit Option Mentoring you know how important we consider the implied volatility spreads between the months when entering a time spread. We talked about at theOptionClub, we talked about it in SFO (we will talk about it again in this month's feature article). I thought you traders might like to see a good example of how this trade can be executed and return a very decent return in less than 5 trading days.
Last Monday (11/23), with the market in the middle of a decent sell off we noticed that the term structure of between December and January had become inverted. Implied volatility of December was actually higher than January. This occurrence has been something somewhat rare.
Since the 2008 Meltdownr when we have seen implied volatility inverted like this I have seen decent success buying bullish time spreads. With the OEX at 530, I bought the Dec-Jan 535 call spread for 5.00. My goal was to make 10% before commissions.
Over the next few days the spread flipped back and forth between slightly positive to slightly negative. I actually could have gotten out on Tuesday in the AM with 25.00. A gain of 5%. I decided to hold off because I thought I could get 10%. You can see the path vols took, not surprising to me, but probably to most people this trade was basically break even to a slight loser on Friday when IV exploded (we all know my thoughts about Friday).
This morning the IV's finally reverted
We unloaded our spread at 5.50, a gain of 10% in a week (and yes this is scalable). Here is the way the trade looked just before we closed it.
This is an example of the types of trades we talk about during the PM Pit Report on a daily basis. While not an advisory service it is certainly one of the best ways to watch the decision making process of a pro. If you haven’t signed up yet, we have a special deal going on right now, email us mark@optionpit.com to find out the special one month price! This is probably the best deal on the net, seriously, I am not kidding. If you can find something similar I I will give you a membership free for a month. Do NOT forget that the new issue of EXPIRING MONTHLY subscribe here
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Graphs from livevol and TOS
