Today I have a couple of interesting pictures for you that really show the power of Implied Volatility in Calendar spreads. The first is simply a few of where our Featured Trade is. The current picture is pretty much nothing to write home about. It's the nature of Theta positive trading, that we must practice the fine art of doing nothing.
I want to call your attention to the daily P&L - inside the green circle - where you'll see we improved our position by just under $80. That's not a bad day considering the nasty downturn the market took in general; but the really interesting thing is the impact of the IV on the P&L. The RVX was up a nearly 10% today, meaning that the implied volatility of RUT, and therefore the typical value of RUT options increased. As I've mentioned before, the value of options with greater time value increases more as IV goes up - which is why Calendars do better when IV goes up. Check out the picture:
What you see here is a simulated position using the "Analyze" tab on the ThinkOrSwim platform. In pink, you'll see that I have adjusted the Volatility down about 3%, which is just under what it increased today - in other words, I put it back to where it would have been if there were no change. In the green circle you see what the P&L would have been without the massive spike in IV... down $446!!! In other words, the change in IV made a difference of more than $500 (from -$446, to +$79) in this position today. That's pretty nice when price moves hard, and is one of the reasons that Calendars tend to be so forgiving.
Good Trading...
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