Today, May 30, 2014, S&P 500 is resting at all-time highs in the VIX is very low. Not quite the lowest in history, but low enough that it becomes hard to make decent positive Theta trades that rely on higher volatility. In this environment is actually time to consider debit trades versus credit trades. One of the best debit trades this environment is the long calendar spread.
A calendar spread involves purchasing a long call or put further out in time and selling a call or put in the front month at the same strike price. If you look on our trading feed you will see we have been buying long calendars in the SPY just below the current market price. We ought to buy put calendars because they benefit more if the market turns against us and are easier to convert to a diagonal and/or a short put vertithe market keeps rising. We have gotten away from using long call calendars except when they are used in conjunction with another put spread of some sort.
We have produced a video on long calendar spreads which you can view on YouTube by clicking here.
If you have questions about this trade or why we do it in low volatility environments, feel free to post comments below this story or visit our forum pages to get the conversation started.