SPX IV Skew Update

If I were to ask you over the last 30 days when was the best day to throw on an ATM one month calendar what would you say? Probably not Monday morning, but by my best estimates it is true. At 10 am eastern time, if I had bought a 1 lot SPX 1100 calendar, the trade would have cost me approximately 880.00 dollars plus commission. The February 1100 calls implied volatility was approximately 21.3% and the March 1100 calls implied volatility was 20.3.

By the 3:00 pm on Monday the position would have a profit of 146.00 as the front month implied volatility fell slightly to 21.2, and the back month increased to 21.1. That is a return of 146.00 on 882.00 invested in 1 DAY! Just under 17%. By the 3:00 on Tuesday, even with the turnaround our position is up 186.00 dollars, the calendar is now up over 21%. However, the trader should notice something, the IV spread has changed. The February 1100’s have an implied volatility of 20.4 the March has an implied volatility of 20.4. This should be a clue that the trader should exit the trade post haste. The IV’s have swapped from +1.00 when entered to even. If we study the spreads, the front and back have typically been between -1 and -2. When the spread got out of whack that was our chance to pounce. Once it falls close to back in line we should exit. I would be happy with 20% anyway

Here’s the report on our positions!

Underlying Data

SPX Price Chart for Jan 27, 2009

BTU Summary

IBM Summary

WLP Summary

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