XEO JUL/AUG 360 Put Calendar closed

The stock market rally of the century has decimated my short play, the XEO JUL/AUG 360 put calendar. When the front month hedge against the back month long option erodes to less than 10% the value of the long option, it’s time to throw in the towel.

The trade was put on about six weeks ago for a debit of $3.45. Credit received for closing the trade was $1.45, which nets a loss of $2.00. This spread actually got to break-even on Jun 22, just a week ago. But the biggest sell-off in weeks was erased in the subsequent days.

There are still 18 days left on the short front month put, but since its value has eroded substantially, it offers no hedge against theta risk for the long AUG 360 put. With the holiday weekend coming, negative theta would only hurt this trade, and the only salvation would be a series of sell-offs, dropping the value of the S&P 100 and raising volatility.

Personally, I don’t see that happening as everyone is on vacation, creating low volume and a general sense of lethargy and malaise.

What I am looking at closely is the relatively low volatility in the market. Long put calendars work in this environment if volatility increases and/or price action goes lower. It didn’t work on this trade, but then again you don’t get the rally of the century every month.

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