On Wednesday, Dan Sheridan talked to us about managing calendar spreads when implied volatility is falling. Most options traders understand and can relate to the idea of price movement hurting calendar spreads, but understanding and responding to changes in implied volatility is a more difficult concept.
So, we brought in a real trading professional to tackle the subject!
The truth is that calendar spreads can make and lose money in two ways. Price movement is one. If the underlying stock or index’s price moves outside of your spread’s break-even points you gotta do something or you’re gonna lose money. But if it behaves, it’s literally just a matter of time and you’re bound to turn a profit.
Implied volatility is another factor working either for us or against us. Calendar spreads are long vega trades, which means that they are exposed to changes in implied volatility. If it rises the value of our spread will rise and if it falls it’s going to hurt us.
The upshot of this little discussion is that understanding implied volatility, its effects upon long vega trades like calendar spreads, and a plan for responding to changes in implied volatility are good things to know about. That’s what went down on Wednesday.
Hopefully you were on-line with us. If not, you can still watch the video re-play which is now available on our website.
Dan Sheridan and Managing Calendar Spreads When Implied Volatility Drops
By the way, if you are a member of my Trading Room you can download the full resolution version of the video from the download section.
Christopher Smith
TheOptionClub.com