Managing Calendar Spreads When Implied Volatility Drops

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Close – Calendar spreads can make and lose money in two ways. Price movement is one. If the underlying stock or index’s price moves outside of your spread’s break-even points you must do something or you will probably lose money. But if price behaves you’ll likely see a profit.

Implied volatility is another factor working either for us or against us. Calendar spreads are long vega trades, which means that they respond to changes in implied volatility. If IV rises the value of our spread will rise and if IV falls it’s going to hurt us. The upshot is that understanding implied volatility, its effects upon long vega trades like calendar spreads, and a plan for responding to changes in implied volatility are necessary things for an options trader to understand and that is what was covered here.


John Morrison says:

Excellent material

desi sher says:

Don't mean to be negative, but the whole thing could have been explained in 20 minutes or less….and with much greater clarity.

seven says:

1:07:00 …. and 3 – Make sure the spreads between the mid and nat price of the calendars are not so wide that will take a lot of money in your profits when you enter the trade and when you close the trade, if you find the spread is big at entry, expect it to be big when closing. Don't trade those. 

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