I was in an option mentoring session yesterday working with one of my brightest students when we began looking at the SPX September-October call spread. The spread had a mid price of about 13.20 and was probably be trading a little better in the pit itself.
This represented as wide of a volatility spread between Sep and Oct that I have seen in the last year. The spread was about 2 full points, and it wasn't a Friday (as many of you know Friday's can distort IV spreads). This is one of the times when I think that the way FINRA writes rules is really anti-customer, anti-retail trader. When the spread gets this overpriced, how come the way regulations are set up it is impossible to sell this spread.
Margin associated with a long calendar which has 1325 dollars of risk, 1300.00
Margin associated with a short call calendar which has 1325 dollars of risk, over 22,000!!!!
This is why the trader did not enter the trade, the margin was 20k. If the trader could enter the short call time spread based on the risk instead of margin the 1085 spread where the trader sold October and bought September would have returned over 6% over night. The underlying moved down today, and at the same time the September contract gained a bunch of value.
With volatility up today, because of the weighted vega of time spreads, it was actually better to be short the calendar than long relative to the other way around. Calendars which are a long raw vega trade, but short weighted vega got smoked today, even thought IV increased (we have gone over this many times).
It is completely silly that traders are unable to enter these types of spreads. It forces traders to put on risk that is one sided. Traders, I understand the concept of long wanting to pay a bunch of premium, but shouldn’t the world be able to put on a long gamma spread, that is short vega, without tying up 20,000 dollars plus of capital. There are many times when this is clearly the better trade, and maybe the safer trade.
If you are interested in learning more about short time spreads or weighted vega, feel free to shoot me an email, mark@optionpit.com, call (888) Trade-01, or sign up for the AM Pit Report.
