As we stated on our blog Friday, the two things that really determine the success of a long calendar are buying low volatility and a tight spread. For those of you who have been at this a while though and trade calendars, it is really just this: Price. A calendar that is too cheap is likely to win, and over time, trading calendars will win big. Let me be clear, I dont mean inexpensive, I mean, cheap; in that, the calendar should cost more than it is currently trading for at a given time.
What makes a successful calendar spread? It's actually pretty easy to figure out:
1. Buying low overall Implied Volatility
2. The right spread between months
In other words, being able to buy the back month option for a cheap price and then, relative to the back month option, being able to sell the front month option for an expensive price. Here are a few things that don't matter:
1. The time frame of the trade
2. The Theta (if you are using spreads as a theta play and not trading the vols, you will lose)
As I was sitting down to write the blog today, I have to be honest there were about 3 different things that I wanted to write about.
Well, if you are Eddie Lampert, I guess this makes up for Sears. Since he is a smart guy, he will probably end up doing pretty well on both (if not already). But this is about AutoZone and the blowout the stock had today. The question is, if there is something to do, and if you are not, well, Eddie Lampert andget to see this as an opportunity to ride the momentum up.
We had a pretty listless day today. VIX down with the SPX down is usually a snoozer, as the market takes a break and evaluates what volatility is really worth now that the printing presses are going full steam. That moisture you feel in air is the strain of the dollar machine blowing steamy exhaust out of the building. I guess the Euro theater is now just a spectator sport as the two sides decide what to give and how much to want. Either way the central banks have committed to throw money at it so the VIX is looking if
For those of you not paying attention today, despite the slow equity markets, there is a market where things are really moving around: Grains. Both SOY and CORN are getting smoked today. Corn is down limit, and Soy is off as well. Yet, what is interesting is that, despite an apparent break out today, option prices on the futures and, subsequently, the ETF's are still pretty low.
The investing world looked into their asset bucket and noticed something funny. They owned a lot of securities that yield something a little less than the rate of inflation and they started to freak out. Let the stock buying begin. And what happened to that bastion of safety (we use TLT as a proxy) the Treasury bond? Look at the chart of the TLT below.
Charts by thinkorswim (www.thinkorswim.com)
Many of my option mentoring students are constantly worried about what ifs. What if the market crashes? What if the market drops? What do I do if my trade falls apart? The one thing I almost never here from my traders is 'What if the market crashes UP?" This is funny because that is about the only risk in the market right now. Take a look at this chart from LiveVol:
Livevol (R) www.livevol.com
With the German High Court signing off on the ECB bond buying bonanza, the ball is now back in the politicians court. The problem, of course, is that is where the ball has been for 3 years. However, the market looked very favorable at the ruling, which takes a huge chunk of systemic-type risk out of the market for the short term. Or did it? I think there are two parts of the puzzle.
Our COO Mark Sebastian was on Bloomberg today discussing $AAPL ahead of the earnings. Here is the Video: