RUT Calendar 5-6

Today was the day I initiated my feature trade for June expiration. This month I will be tracking a RUT Calendar trade throughout the month. The first question one might ask is "Why a Calendar, and why now?" Good question. First let me show a quick snapshot of the RVX chart. Remember that the RVX tracks the implied volatility of the RUT index.

What is really obvious about this picture is that the RVX has broken a significant many-week support line. For a couple of months it has been hanging around the high 40's to low 50's, and suddenly breaks into the low 40's, closing today under 43. I use very few indicators, but the ONE I do use is the RSI. You will also notice that the RSI indicator for the RVX is extremely oversold, resting at 2.8. Now I know you might argue that technical analysis has no place in the patterns of a volatility index, but frankly I would disagree with that. EVERY other time this indicator has been oversold like this volatility has either flattened or (far more often ) increased in the following days.


So why is all that important? Calendars are long Vega trades. In other words, they benefit when volatility increases. I don't have any better crystal ball than the next guy, but I believe its a reasonably good assessment that IV is more likely to level out or increase for a while. In the end, the break of support probably means it will stay below the line and perhaps head lower, but short term I'm hoping for a bit of a retracement and leveling.

Meanwhile calendars also benefit from time decay. So if volatility stays level I win through time decay. If it increases, I win through time decay AND IV. If volatility decreases I can still win through time decay as long as it doesn't decrease too fast.


The biggest risk that I have with a Calendar, aside from plummeting volatility, is DELTA risk... or price movement risk. This is a relatively delta neutral trade when initiated (delta=1.4 right now), but if price moves too far we can lose. For that reason I chose to put on a triple calendar. Some people call this a "shotgun calendar". Specifically, it's three calendars, one each at the 460, 500, and 550 strikes.






By spreading my calendars across the three strikes I am able to reduce my price risk to some degree. It doesn't actually reduce deltas, but it does provide me with a higher probability of winning. You can see by the picture that the probability of profit is about 54%. If things go bad I will adjust far before that, but it's a starting point. In contrast, a single strike Calendar would have only given about a 40% profit zone. That doesn't mean this is better... there are tradeoffs. It just suits me better. I like it because adjustments are less frequent.

That's it for now. The position is on and we will monitor it and manage as needed. The goal will be to garner a 12-15% profit in the end.

Good Trading...