Update: NDX Double Calendar
I started an NDX double calendar from a thread I was reading in a yahoo group. The conversation was about when to use calendars and why using calendars right now made a lot of sense with the volatility so low.
Anyway, I legged in to this one first on the bottom side (puts) and then on the top side (calls) a few days later. That allowed me to get good fills and almost immediate profit. Take a look at this graph:
The vertical red line on the left is the lowest break even point at 1310.24. The vertical red line on the right is the highest break even point at 1493.90. The line in the middle is the ‘live line’ or current price.
Right now, we are sitting at a profit of close to +15%. This is inline with my profit target so I will be really sensitive to any losses from here. I will likely close this down or pare down my position if my profits starts to decrease. (It’s tough to do this when you consider that I could hold closer to expiration and possible reach 30% or better!)
Important Note: Remember that our TOS analyzer is only showing the profit at expiration assuming volatility stays the same. If vols go down it will be a lot less (if any). If vols go up it could be much more. Don’t be fooled! The price could stay exactly where it is and I could still lose money.
Mojo
Popularity: 27% [?]
If you enjoyed this post, make sure you Subscribe to Insane Money by Email
Calendars are positive vega trades. If vols go down -- particularly on the far month long side -- your position will lose value, even if the underlying price doesn't move. (In fact, if the price DOESN'T move, it may be more likely that vols WILL go down).
This is a tricky environment for calendars. On the one had, vols have fallen and are staying flat. Yet, they are still high historically. For example, ATM contracts in the DIA have vols in the mid 20s, and they are nice and tight front month to back month. Yet vols in DIA just a year ago were in the mid-teens.
Dan Sheridan was at the Options Xpress expo a week ago, giving a talk on calendars, and I buttonholed him afterward and asked about rolling calendars. His view? Right now, guerilla calendars are the way to go, since even though vols are low/quiet, they are still high historically. His advice: set your profit targets modestly, and when they get hit, get the heck outa Dodge!
Isn't it odd, Karl, how we all get used to the recent few years? I see the VIX right back where it used to be before the 04-mid 07 aberation hit. We had roughly 18-50 as the norm for years, then we had the weird 3 1/2 years, and now back to where we used to be. It will rarely, if ever, be as good for diagonals and calendars as the early '07- late '08 period ever again.
If you have the direction right, then delta does conquer all. If you have hte direction wrong, you can no longer count on Vega saving your skin.
Matt
But you're right -- our experience today definitely colors where we think we might be tomorrow.
I do think that calendars/diagonals remain VEGA hazardous because a 30 on the VIX IS pretty high historically. One question is, of course, whether we flat line vols at this level (30 being the "new" normal) or descend, over time, back into the teens.
The directional desire for traditional guerilla calendars and diagonals (not the ones that you do, of course) is sideways. The question is . . .will sideways lead to further calmness and declining vols?
Reality has set in, and reality is boring.
The economy sucks. There are no jobs. No one's buying cars (except me, just bought one this weekend). There are no illusions about house prices.
So much of the uncertainty, craziness, has been bleached out. Everyone knows where we are, and we're gonna be staying here for a while. All the flights have been cancelled and we're sitting in the airport wondering if it's possible to get out sometime in the next three days.
We're bored, we're tired, we're resigned ,we're goin' nowhere for the time being.....and so, we're non-volatile.
But if it turns out the economy sucks ever MORE than we think it does, that we get 11-12% unemployment, that nobody is earning any money, we can see vols run up.
But if, on the other hand, we're going to sit here for a while bouncing around 900 on the S&P until everybody wakes up and thinks, "I can see the upturn!" Then vols will plunge right down into the teens and the market will take off like a jet off a carrier. If you're holdin' calendars then, good luck.
Thanks for showing us this interesting trade. It looks great, but when I investigate using the NDX options in TOS I find that it's size is way to big for me. When I priced them each of these calendars costs around $2000, so the double is about $4000.
I thought I would look at it in the QQQQs but I can't figure out the relation between them and the NDX or NQs. It is not an obvious ratio to me. Any observations would be helpful. Thanks.
- aw
Regarding the relation to the NDX
From the NASDAQ site itself:
NASDAQ-100 Index Tracking Stock has been initially priced to approximate 1/40th the value, as adjusted, of the NASDAQ-100 Index, and may be bought and sold at intraday prices throughout the trading day - something you can't do with conventional index mutual funds that are generally purchased or redeemed only at an end-of-day closing price related to net asset value.
The pricing of NASDAQ-100 Index Tracking Stock is continuous, subject to any trading halts, during NASDAQ trading hours. That means you can obtain up-to-the-minute share prices whenever the market is open.
From another site:
I find it interesting to note that the PowerShares QQQ Trust (formerly known as the NASDAQ-100 Trust) is still has only three Qs in its formal name. Only the symbol was changed to the quad Q when shares moved to trading on the NASDAQ exchange; so those folks who still call it the triple Q are not just stubborn or ignorant.
The QQQQ pays a dividend quarterly, issued on the last business day of April, July, October, January. This obviously impacts the call options in those months.
-aw
M <leaving Dodge>
Could you share more details about how yuo got into it? How far away from the money were the calendars when you bought them?
-aw
I had not been doing NDX before looking at your trade. Can I assume the NDX has the same advantages over QQQQ that RUT has over IWM? Taxes, expenses... And the same limitation in that you need an relatively larger account size?
Matt
I didn't discuss it in my post above, but my research did confirm your thinking. Since it is cash-settled like the others it is treated the same.
-aw
You know me, I have no problem giving to the IRS and the broker exactly what they deserve, but I want to give them nothing more!!! I thought I would bring it up since we have some newer members and they may not have read through the IWM vs. RUT threads...
Matt