best/worst futures for option calendar spreads

Discussion in 'Trading' started by stevenpaul, Nov 22, 2010.

  1. Hi traders,

    Certain futures markets are just unsuited for the calendar spread option strategy. In an article in August, 2010 of Active Trader magazine, Dennis Dzekounoff, explains how the different expiries of the VIX contract are so un-correlated as to behave almost like completely different assets. Consequently, many brokers treat option calendar spreads on the VIX as intermarket spreads, with corresponding margin requirements.

    In many futures markets, the correlation of differing maturities can be weak, making them unsuited to a strategy that is based on the notion of being hedged in a position of long and short options, with the goal of capitalizing on theta.

    I would think the agriculture and energy markets, and the Vix of course, would be unsuited to calendar spreads (unless the trader were actually seeking to express a view on the correlation of the different expiries, which I am not). My question is which types of futures markets are suitable for option calendar spreads. That is, which markets exhibit a high degree of correlation between varying expiries, akin to that of equities. My guess is that the financial futures would be alright: indexes, currencies, treasuries. The metals don't seem to be influenced by the calendar too much, either, and thus might be suitable for calendar spreads. Correct me if I'm off base on those assumptions.

    No question that time skew will show up in every market, but it's more the exception than the norm in most. A favorable time skew is for many traders of calendars an important pre-condition for placing the trade. There's a difference, however, between occasional volatility skew between expiries, and a market that is quite lacking in correlation between the expiries. My concern is in avoiding the latter.

    Thanks for your insight, friends,