XEO JUL/AUG 360 put calendar

Yes, putting on a long put calendar is a directional trade that profits if the stock goes down, but it’s more than that. On Thursday, I put on the XEO JUL/AUG 360 put calendar for a debit of $3.45.

We’ve had quite a rally over the past several weeks. And just when you think the bulls have exhausted their ammunition, along comes another fusillade of buying. When will this rally end already? The long put calendar is a way to play the market short AND play the current volatility long. You basically have a couple of factors that contribute to your success. First is price action. Obviously, as price action declines a short delta position will be in position to benefit.

Next is volatility. When markets sell off, the volatility normally increases as every worried mouse runs out to buy protective puts, bidding it higher. When you have a long put calendar, you are long vega, which means that you win when the thing you’re long (ie, volatility) goes up in value.

And let’s not forget positive theta. You’re long put calendar will accumulate theoretical monies each day that goes by, because your short put in the front month will decay at a faster rate than your long put in the back month.

So, this is a directional play in both the price and volatility arenas. I think the rally is a little overbought and due for a correction. And I also believe that the current volatility is oversold and also due for a correction. The VIX-style volatility index that tracks the OEX is the VXO, and it settled at a low-of-the-year yesterday in the $32 range.

The XEO is a European-style, cash-settled index. It’s twin is OEX, which is the American-style version. Both track the S&P 100. I’ve chosen the XEO because of some chicanery that happens with early exercise in the OEX product.


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