RUT Calendar 5-13

The RUT Calendar had an eventful day. Today is a good time to explain some of the dynamics of trading calendars. Unlike trading stock, options have several moving parts that make them a little more interesting. With stock, the only thing a trader/investor is concerned about is price movement. If price goes up we make money, if it goes down we lose. With options, on the other hand, we are concerned about price, PLUS we have to pay attention to time decay (remember, they expire), and implied volatility. There are at least these three things that can impact the value of an option, even if two of the three remain unchanged.

Today we had some movement in all three that was worth noting. Let's look at each... First, price moved big time. The Russell 2000 dropped 23+ points today. That's a monster move, nearly two and a half standard deviations. That's big. As you can see by the P&L graph, the white line which represents the current P&L is slightly under zero where we are. In other words, we moved so far off center from the big move that we are a bit under water.

Second, implied volatility moved up big. RVX, the index that tracks the implied volatility of the RUT, moved up a whopping 7.2% today... a HUGE move. This simply says that people are buying options, likely as protection against these crazy moves, and are therefore bidding up the prices. IMPLIED volatility, is just what it says... it implies that volatility will be hire in the coming days... or at least the market implies it.

Finally, we had time decay. This one is pretty much a constant. Not in the sense that it's equal each day, but it does happen each day. The only thing it takes to get some time decay is for the sun to come up and go down. Each of these events took place today, and each of them had an impact on the value of the calendar trade. Here's the summary:

• Price went down hard (Delta) - NEGATIVE for the trade.
• IV went up hard (Vega) - POSITIVE for the trade.
• Time Decay (Theta) - POSITIVE for the trade.

So all in all we had a bit of a down day, but I actually like that IV went up a bunch. If we stabilize a little now, this will be good in the long run. Meanwhile, I am at the ready should defending this trade be necessary.

Good Trading...