How to Win With a Long Time Spread
How to Win With a Long Time Spread
Well there was another humdinger of a market yesterday. The numbers on the card said VIX up .01 and SPX down 2.26. You would think there was nothing going on. But, as I mentioned in Wednesday's blog, the VXX was lively with a $1.34 intraday move. Intraday the VIX was zipping around as well. If we are talking about time spreads you would only want to position one well away from the strike in a situation like this in the vol. products with a pretty fair bias in direction. An ATM time spread is a recipe for disaster with a fast moving realized volatility. Think sleepier, like health care.
The Supreme Court is making some news this week hearing arguments about the health care law. Without being over political the news out of the opening arguments is not great for the current health care law Congress passed last year. Will the outcome be good for health care stocks? I think if you look at the chart below of the XLV the market seems to be leaning in that direction. The reality is the XLV has a hard time moving 1 handle in two weeks in the best (or worst) of circumstances. This is a good candidate for a more bullish time spread. Look at the cheapie vols. in the LiveVol chart below.
For a time spread the position likes:
- Buying relatively low back month volatility
- A relatively low realized volatility
- Time to make it happen
I think buying the XLV Apr/May 38 call spread would fit the bill. A low delta and it is sleepy but the bias is up. This should work around the case and the goal is a long call for a discount before the Supremes deliberate in June.
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Mark Sebastian is the Director of Eduction for Option Pit, and a former market maker on both the Chicago Board Options Exchange and the American Stock Exchange. He is co-host of "Option Block," the wildly popular show on The Options Insider Radio Network.
He has been published in nationally on Yahoo Finance, quoted in the Wall Street Journal is a featured contributor for TheStreet.com. He also writes regularly for SFO, and OptionsZone, and is the managing editor for Expiring Monthly: The Option Traders Journal.
To learn more about Option Pit and its mentoring services, please visit OptionPit.com
About Mark Sebastian
Mark Sebastian is a former market maker on both the Chicago Board Options Exchange and the American Stock Exchange. Along with his role directing the path of education for Option Pit, Mark is currently the director of risk for a private hedge fund. He writes a daily blog, the Option Pit blog, formerly Option911. Sebastian has been published nationally on Yahoo Finance, Google finance, Financial Times Alphaville and is a featured contributor for TheStreet.com. He is also published regularly at SFO, the Options Insider, and is one of the Co-Hosts of The Option Block Podcast, a featured Podcast from Options Insider Radio. Mark is the managing editor for Expiring Monthly: The Option Traders Journal. Sebastian has a Bachelor's in Science from Villanova University.
To learn more about Option Pit and their mentoring services, please visit: http://www.optionpit.com
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