Profit from Volatility Contango – SPY Short Calendar Spread

Profit from Volatility Contango – SPY Short Calendar Spread

This Trade Was Closed January 24, 2012

Closing this trade idea as options expiration is through.

Original Trade Post:

I can’t take credit for the concept of this trade, as I read it on Steven Place’s twitter feed this morning (but I have a slightly modified version of it, in that I am using the SPY instead of the /ES futures to trade it). See Steven’s explanation at this link:

http://www.investingwithoptions.com/2012/01/13/short-term-volatility-absurdly-oversold/

As you may notice from my earlier attempt to trade a bounce in the VIX through TVIX, one of the things that hurt me in that trade, and prevented TVIX (2 X volatility ETN) was how that ETN is calculated. It is a combination near and far dated VIX futures. The near term futures had much lower VIX prices than the far dated VIX prices, resulting in a time contango, and that phenomenon suppressed the prices on VIX ETN products (like TVIX and VXX).

This current trade attempts to take advantage of areas that TVIX and VXX suffer. Here we are going long the near dated IV (by going long the JAN SPY ATM put), and going short the far dated IV (by going short the FEB SPY ATM PUT).

This trade makes money a few ways:

If the SPY sees a strong move between now and next friday.
If volatility drops hard on the February contracts
If volatility rises on the January contracts
If the vol “spread” normalizes again.

The main two risks here are:

Time decay
Front month vol continues to drop hard.

The picture shown, is from Steven’s post, showing a the difference between the near ($VIN) and far month ($VIF) VIX options, and how that difference is the greatest it’s been in the last 2 years.

Trade Details

  • The Ticker:SPY
  • Cost: $1.88 net credit per share
  • The Trade
  • Long JAN 129 Put / Short Feb 129 Put

  • Trade Opened: January 13, 2012
  • Trade Closed: January 24, 2012

Chart courtesy Finviz. Click to open larger.


Additional Image Provided by eatlovetrade:


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