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2012issue C1029-32

Monthly calendar income under a volatility-regime process

This case study reconstructs a monthly option-income workflow built on calendar spreads. Size, strike count, and tenor followed the volatility outlook, a short moving average set only the opening delta lean, and a precommitted price-and-loss grid handled rolls.

  • A calendar spread sells a nearer-month option and buys a farther-month option so the short contract can lose value faster than the long contract.
  • Regime-based sizing kept a monthly market presence while changing size, strike count, and tenor with the volatility outlook.
  • Fills, rolls, and a 20 percent loss close were precommitted, so adjustments followed a grid rather than a rewrite.
  • A short moving average leaned starting delta only. It did not decide whether the monthly calendar book stayed open.
Entries in this reading3 entries
Current trackCalendar spread trading19 readingsOption income strategy85 readingsMoving average597 readings

A calendar book that stayed in the market each month

A calendar spread is constructed by selling a nearer-month option and buying a farther-month option, with the short contract designed to lose value faster than the long contract.

The case-study trader typically opened calendar positions 40 to 45 days before the short options expired and remained in the market each month.

Regime-based sizing and tenor

When volatility was expected to stay low or rise slowly, the book used larger size and more strikes, including a triple calendar with one strike at the money and companions five or 10 points above and below.

When volatility was high and expected to fall, the starting book used only one at-the-money calendar and added strikes only after the underlying moved.

Spacing between the short month and the long month ranged from four to 12 months. Shorter tenors were used when volatility was high and possibly declining. Longer tenors were used when volatility was low and possibly stable or rising.

Midprice entry and a mixed working book

The preferred fill was the spread midprice, with a stated willingness to pay up to 0.20 above that midpoint.

Call-only butterflies that bracketed the calendar were used to cut vega risk in half. The working book was split into five 20 percent sleeves: IBM calendars, SP calendars, RUT call butterflies, SPX call butterflies, and cash.

A precommitted roll and loss grid

An adjustment was planned for when the underlying reached a precomputed zone between expiration breakeven and the short strike, typically by removing 50 percent to 100 percent of the position and rolling to a new bracket around the then-current price.

A position that lost 20 percent was closed promptly rather than held through a larger decline.

Opening delta from a short moving average

After the 2008 episode, if the primary underlying was above its 20-day moving average the starting calendar was given a slightly long delta. If it was below that average, the starting delta was slightly short.

Editorial reading: that moving average is a starting lean only. The monthly calendar presence does not wait on the average.

Educational research material, not investment advice. Historical source context does not establish present-day performance.
15 of 18 in the Calendar spread trading track
201621-25 pp.Next on Calendar spread tradingA VIX calendar-spread case after the 2015 volatility spikeThe VIX is a 30-day forward implied-volatility measure on the S&P 500, built from a strip of short-term out-of-the-money calls and puts.
All readings on this track · 18 readings
  1. 1982Constructing commodity spreads, calendar legs, and option straps
  2. 1987Seasonal calendar spreads as financed capital slots
  3. 1989Seasonal dates, confirmation, and reconstructed spread bars
  4. 1991Calendar-spread divergence as a demand clock for commodity reversals
  5. 1992Expiration-forced convergence for basis, calendar, and option-income trades
  6. 1993Write the soybean intercrop calendar as one procedure
  7. 1996A commodity-basket redesign read as a proxy and a calendar-spread
  8. 2003Calendar spread construction by volatility skew
  9. 2003Livestock calendar spreads during a commodity-index roll
  10. 2004Same-strike calendar construction, decay income, and account gates
  11. 2004Range-bound calendar spreads and precommitted exits
  12. 2007Construct futures size from the good-faith deposit and the spread
  13. 2007Critiquing calendar spreads when reversals overrun
  14. 2010Name the spread, then construct the legs
  15. 2012Monthly calendar income under a volatility-regime process
  16. 2016A VIX calendar-spread case after the 2015 volatility spike
  17. 2017Yield curve kinks as spread laboratories
  18. 2018Bitcoin futures contract choice, percentage margin and calendar spreads
By fieldOptions and volatility435 readingsBy year2012165 readings
All 19 readings tagged Calendar spread trading
Also on Calendar spread trading5 readings
1992Expiration-forced convergence for basis, calendar, and option-income trades2004Same-strike calendar construction, decay income, and account gates1982Constructing commodity spreads, calendar legs, and option straps1987Seasonal calendar spreads as financed capital slots1989Seasonal dates, confirmation, and reconstructed spread bars