Tony B: Thomas, we're back my friend. I have been working on developing some high frequency spread strategies using Trading Technologies’ Algo Strategy Engine, which is extremely impressive (more on this in a later post). Tom S: [chuckling 00:01:20] Tom S: Just remember, net P and L down. With VIX call calendar spreads, doing it one time for 78 months starting in 2008, it was the only underline we could find where you're actually down money. Any time you get a situation where 14% of trades result in losses greater than debit paid, that's a little nervous. Register today to unlock exclusive access to our groundbreaking research and to receive our daily market insight emails. Still too high. Tom S: That's all it is. Tom S: We said, "Okay, you can do this. Tom S: Yeah. Having a look at the chart below you hopefully see the spread trading idea by yourself: VIX futures spread trading. Tom S: You've got to know. Tom S: You guys all know the dangers of VIX calendar spreads, but we want to actually show you the numerical side to it. Tom S: That would be nice. It officially starts at 7:15 but we want to basically start a few minutes early if we can get all filled up before then. The absolute worst. Forget that it's possible. Tony B: Everybody's getting skinny in here but me and you. This is a perfect example to go back to what Jacob was just talking about a second ago. You're so scary right now. Tony B: Why do you think your car insurance is $500 a year? Tom S: Right. Tony B: Mm-hmm (affirmative). Tom S: It's been great. Tom S: I heard you were worried. The last trading day is the Tuesday before the Wednesday of VIX options/futures expiration. tastyworks is a wholly owned subsidiary of tastytrade, Inc (âtastytradeâ). A day trading system strategy in VIX futures requires working the spread to enter passively lowering the entry cost but this is suitable for high frequency. To visualize this, we simply subtracted the loss frequency from the profit frequency at each level: As we can see, the calendars entered when the VIX was between 15 and 25 reached the loss levels more frequently than the same profit level (resulting in a negative value). Tony B: Yeah, you were talking about this with Chris on the pitch yesterday. On normal equities, calendar spreads are defined risk trades, as the max loss for a calendar spread is the debit that you pay for the trade. Modeling a spread strategy on a retail platform like Interactivebrokers or TradeStation is extremely challenging, due to the limitations of the platform and the Easylanguage programming language compared to professional platforms that are built for purpose, like TT’s XTrader and development tools like ADL. Tony B: Mm-hmm (affirmative). Tony B: [chuckling 00:11:09] Is there a wall there too? We have a phone segment coming up. Yeah. Tom S: I understand. tastytrade is not a licensed financial advisor, registered investment advisor, or a registered broker-dealer. Tony B: Hopefully 15, 26. Then we charge you $700 for every [inaudible 00:11:09] However, there are certain products which this is not the case. Tony B: [chuckling 00:03:57] We went to the day of VIX settlement which may or may not be the right thing to do but, again, very hard to do anything outside of settlement. What was that call spread we did in there? Fun. Market Measures. Tom S: Yeah, I like the fact that [inaudible 00:00:32] stock's down. Come on. Introduced in 2004 on Cboe Futures Exchange â (CFE ®), VIX futures provide market participants with the ability to trade a liquid volatility product based on the VIX Index methodology.VIX futures reflect the market's estimate of the value of the VIX Index on various expiration dates in the future. Select VIX Institutional Research. Tony B: I'll look at it right now. Ever. Tony B: But it says 7:15 to 9:15. We recorded the P and L on the close before the VIX settlement. We're down $4.00 now, trading $21.06. Tom S: I know. Let's hope. We reverse engineered all our risk in the VIX, and we found was that for a typical trade, whether you put on for a credit or a debit, whatever it was... Tony B: What are you doing over there! It would be nice if we could get a little downside fall. Tom S: But we're going to try to start at 7:00. In one example, the calender spread was $1.57 and ended up being a $794 loser. This is a follow up to my earlier post on a Calendar Spread Strategy in VIX Futures (more information on calendar spreads ). Tony B: [inaudible 00:06:24] Either it contracts or expands but it all has to take place prior to a specific date. Tom S: Okay. Tom S: SMPs are down 275. Tom S: All right. Tony B: Right. Tom S: VIX options are traded under the same ticker. Tom S: It was the... Tom S: It just dropped $7.00 Hopefully it's okay today. Excel automatically displays the DOM of the VIX futures reverse calendar spreads with the bid ⦠Another example, the calendar spread was 20 cent credit, ended up being a $290 loser. The graph included the P/L versus the Debit paid for the VIX Call Calendar Spreads. Some good news... The exchange quotes these markets as negative numbers for the bid prices and positive numbers for the ask prices. Tom S: Liz and Jenny, I think it's 1:30. The graph showed that VIX Calendar Spreads have the potential to lose much more than the debit paid for the spread. It's 33 cents. We've done calendar spreads all over the place and we already know you can't do it in the VIX. Average credit, average debit, whatever. Options, futures and futures options are not suitable for all investors. As long as VXX remains above $13.50 (14 strike put minus the 50 cents), the calendar spread will deliver better returns over the next two weeks than the long put. With over 50 original segments, and over 20 personalities, weâll help you take your trading to the next level, whether you are new to trading or a seasoned veteran. A strategy we consider in low volatility environments... VIX calendar spreads are one of the trickiest plays in the option world, so much so that some brokers don't even allow them. *VIX expiration is the Wednesday 30 days prior to the next month's option expiration. Do whatever you want." On normal equities, calendar spreads are defined risk trades, as the max loss for a calendar spread is the debit that you pay for the trade. Why not? tastyworks, Inc. ("tastyworks") is a registered broker-dealer and member of FINRA, NFA and SIPC. Tom S: The trade is generally constructed by selling a near-term call or Put and buying a longer-term option at the same price. Quiet Foundation, Inc. (âQuiet Foundationâ) is a wholly-owned subsidiary of tastytrade The information on quietfoundation.com is intended for U.S. residents only. By the way, one error. Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastytradeâs podcasts as necessary to view for personal use. Tony B: Mm-hmm (affirmative). Don't ever do calendar spreads on VIX. Quantitative Research and Trading © 2016-2018 All rights reserved. Trading securities can involve high risk and the loss of any funds invested. For now, we're just going to focus on the VIX 'cause it's the most prevalent of all the underlying products where calendar spreads can get you in a heap of doo-doo. Or it's worth $100. We went back to June of 2008 to present. Tony B: Sure. So, I saw an opportunity Friday that I felt was a good deal: Sell VIX 20th Jan 2021 26.0 Call for $4.25 ~67 DTE Buy VIX 17th Mar 2021 26.0 Call for $4.745 ~123 DTE Underlying was about 23.8 Correct? Man, we go so much stuff to do. So, despite having a vega of +0.83, the long calendar spread actually made money from the decrease in ⦠Tony B: You've got Apple losing $40 billion over the last couple days that it just created? You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of Quiet Foundationâs systems, services or products.  Daily settlement prices from Mar 2004 to June 2010 were used to fit the model, which was tested out of sample in the period July 2010 to June 2014. Tom S: Yeah. Tom S: I know. Tony B: Oh yes. The chart shows the rolling, non adjusted front month and 2nd month VIX future. Tom S: It's hard. The SPX is one of them for deep in the money calendar spreads, but we're not going to go there yet, okay? Tom S: VIX calendars. Characteristics and Risks of Standardized Options and the Risk Disclosure for Futures and Options found on tastyworks.com. In order to demonstrate this using real numbers, we decided to test a mechanical calendar spread strategy in the VIX. Tom S: That's right. Tony B: Reverse engineered? Most calendar spreads are set up to have a one-month differential. I'm pretty sure that this is going to be a tough one for them to pull off, but I know what they were trying to do and I'm fascinated by that part of it. A cross-country spread is entered into, short 100 VIX futures and long a number of VSTOXX futures, adjusted daily, such that the size (i.e., point value) of the short and long positions is the same. [inaudible 00:00:27] nice movement down 10, oil down a $1.20. Tony B: Mm-hmm (affirmative). Here's the study. The information on this website is for informational purposes only, and does not contend to address the financial objectives, situation, or specific needs of any individual investor. Tom S: No, it was only... In the low (VIX below 15) and high (VIX above 25) volatility environments, the SPX calendar spreads reached the profit levels more ⦠You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastyworksâ systems, services or products. The VIX is one such product. The lesson is clear; if you are going to go long a calendar spread, you need to be bullish on volatility as well or you will get run over. VIX calendar spreads are one of the trickiest plays in the option world, so much so that some brokers don't even allow them. All investing involves the risk of loss. Each VIX expiration is some time in the future that we're hoping something happens to the volatility. Serum back down to $69. Tony B: 15 points? This changes the risk profile of calendar spreads entirely. If Apple's down you must put the money into Netflix. A VIX futures calendar spread involves buying a futures contract maturing in 1 month and selling another one maturing in a different month. We have two more skinny segments coming up. tastytrade is a real financial network, producing 8 hours of live programming every weekday, Monday - Friday. I don't think I would ever get tired of being challenged by him. Tony B: I thought something was horribly wrong. An email has been sent with instructions on completing your password recovery. This isn't to say that they cannot be ⦠Tony B: Mm-hmm (affirmative). The VIX Index is based on real-time prices of options on the S&P 500 ® Index (SPX) and is designed to reflect investors' consensus view of future (30-day) expected stock market volatility. tastytrade is the parent company of tastyworks. Investment information provided may not be appropriate for all investors, and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. Please enable JavaScript to view the comments powered by Disqus. The SPX is one of them as well. Because it's probably only worth about $400.  You also can’t easily simulate passive entry or exit strategies, which typically constrains you to using market orders for both legs, in and out of the spread. Let me go back. Okay. It's so funny, right? Tony B: You're at 7:15 [crosstalk 00:05:04] That's what I want to do. To start them off.  These features of the strategy prove robust (and even increase) during the four year out-of-sample period, although the annual net profit per spread declines to around $8,500, from $36,600 for the in-sample period. The information on this site should be considered general information and not in any case as a recommendation or advice concerning investment decisions. It's the 130, 131 calls. The reader itself is responsible for the risks associated with an investment decision based on the information stated in this material in light of his or her specific circumstances. I think I can have him on the show every single day. Very deep in the money. Some firms don't allow you to do this at all and some firms, they allow you, but you have to put up a lot of money. Trading in derivatives and other financial instruments involves risk, please read the Risk Disclosure Statement for Futures and Options. You got manye-mini S&Ps a little off their lows. tastyworks offers self-directed brokerage accounts to its customers. If you're talking about the average debit being a dollar and you're talking about biggest loss being $6.36, then there's, essentially, kind of how you measure risk reward. It's a stupid trade. Tony B: You were worried for me? Tom S: 15 points, for sure. Put up $700." Maybe they caught all the Apple freaks. Tony B: On your own use of capital. Tony B: Home Depot has had a nice move down, down 85 cents. Tony B: And rightfully so. It'd be really nice if they could break... I'm just going through everything. Tony B: I was worried about the Nasdaq there for a moment. Tony B: Okay. The wax on [crosstalk 00:01:21] Now the risk is yours, I collect my commission, and I'm done. Tom S: Mm-hmm (affirmative). We got Nasdaq down a $1.50. We're not doing VIX calendar spreads. It was up all day. Applicable portions of the Terms of use on tastytrade.com apply. Tony B: Mm-hmm (affirmative). We sold it for 48. Tom S: But I want to do it from 7:00 to 8:30, so we'll see what we can do. Tony B: You're at 7:15. Good move in there too. The Futures Spreads page shows prices for spread quotes, as traded by the exchange.A "spread" is a contract to buy or sell multiple futures or options contracts at one time, rather than buying or selling individually. Prior to trading securities products, please read the Apple down $1.68 or so, $1.70. Tom S: Some good news. Tom S: A strategy we'll consider in low volatility environments is a calendar spread. Based on the results, 14% of the trades resulted in losses greater than the debit paid. The statistical value is about $125 and then you have to put on whatever the administrative costs are on top of that, so double it to $250. Tony B: It closed. Dow only down $7.00. Whatever the numbers, it's worth less than $500. Tony B: It'll be fun just showing that it's not what you do. Helps the position a little bit, trading 69. Tom S: Reverse engineered what our brokerage firm risk was in the VIX. It's a really good way to explain it. CHICAGO BOARD OPTIONS EXCHANGE Outline â¢VIX® Review â¢Term Structure of VIX Futures â¢Calendar Spread With Futures â¢VIX Option Calendar Spreads â¢Future vs. Option Spread Tony B: Sure. © copyright 2013 â 2020 tastytrade. Is it worth taking a look at. We figured out the VIX calendar risk was $700. And Dr. Jad is going to do a segment, it's called, "The Skinny on Data Science." In effect, a really good way to explain the VIX is: each cycle of VIX is its own product since VIX options are priced off of the VIX future with the same expiration month. Sign up to get our best stuff delivered to you daily and save videos you want to watch later. Okay. We got Good Trade, Bad Trade next. Tom S: We shorted a call expiring in 27 to 34 days. VIX calendar spreads are one of the trickiest plays in the option world, so much so that some brokers don't even allow them. Got to make a little bit more money on it. I can imagine how it is possible to hedge out contango (or backwardation) in the Vix futures through calendar spreads at a ratio. Another graph showed the top 10 losing trades over the last 8 years on the VIX Calendars. Tom S: 50% of the time of we win. Small Exchange, Inc. is a Designated Contract Market registered with the U.S. Commodity Futures Trading Commission. Tom S: That's exactly right. Past performance is not a guarantee of future results. Tom S: We got a segment right now which his called VIX calendar spreads. The Nasdaq is up $4.00. Each cycle of VIX options is essentially its own product. Don't break the place! You'd be surprised to know there are other products out there where calendar spreads can get a little bit funky. I've actually seen way worse situations, but the takeaway from the segment is, with respect to VIX calendar spreads, that 14% of the trades resulted in losses greater than a debit paid. This Microsoft Excel® dashboard displays a depth-of-market (DOM) view of CBOE Volatility Index futures weekly reverse calendar spreads. Tony B: [chuckling 00:12:31] Tony B: Mm-hmm (affirmative). Tony B: Mm-hmm (affirmative). Tom S: What's cool about this is we were able to put a numerical number of $700 around this discussion of what risk is. Tom S: All this stuff helps. Tony B: Mm-hmm (affirmative). Tony B: Yeah. Tony B: Mm-hmm (affirmative). Results are summarized in the chart and table below. Tony B: Yup. We've lost $5.8 million in 2007. I love Jacob. Just don't. The short calendar call spread is an options trading strategy for a volatile market that is designed to be used when you are expecting a security to move dramatically in price, but you are unsure in which direction it will move. A VIX futures calendar spread involves buying a futures contract maturing in one month and selling another one maturing in a different month. Remember, this segment is designed to be a learning experience. VIX options derive their prices from corresponding /VX futures contracts. They didn't know what real risk was around VIX. Tom S: It's the solution to every problem, it's just, "You covered the risk. S&P 500 VIX Futures Spread prices and quotes. Designed to be learning. I think we sold it for 48 cents. When trading a calendar spread using equity options, the most that you can lose is that amount of money you pay for the spread. A lot of it was just because the legacy clearing systems didn't understand what real risk was around calendars. I'm just looking through all the positions right now. Volatility Index (VIX®) Futures. Here was something interesting. End of cycle VIX futures spread trading. Tom S: Yes. Tom S: I don't mind covering that and getting into something else. To reset your password, please enter the same email address you use to log in to tastytrade in the field below. A calendar spread consists of buying or selling a call or put of one expiration and doing the opposite in a later expiration. Setting Up a Calendar Spread However, there are certain products which this is not the case. [chuckling 00:12:26] Went red for a second. What's the 30, 31 call spread? Tom S: Would've been nice to wait, but what are you going to do? It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. So we're done by 8:30. Follow along as our experts navigate the markets, provide actionable trading insights, and teach you how to trade. Tony B: Mm-hmm (affirmative). Jacob did his job again on Thursday, bringing the market a little bit lower. The guys find out that 14% of the time the loss on the calendar was higher than the debit paid. Tony B: Yeah! Skinny on the Girl Scout Cookies. So, 7:00 o' clock this weekend on Sunday night. Even burdened with significant transaction cost assumptions the strategy performance looks impressive on several counts, notably a profit factor in excess of 300, a win rate of over 90% and a Sortino Ratio of over 6. This is a great example of how even though you are buying a calendar spread, the unique nature of the product has additional risks! But rather than say to people, "Don't trade this," just put a dollar number out there where it says, "This is what it costs to trade." F(t, T 1 ) is the front month's price, and ⦠Jules. All right, let's do it. I might consider adding a second calendar spread if VIX hits either of those levels. I'm not sure that everybody always grasped the way we explained it before. tastytrade is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular clientâs situation or investment objectives. Russell down a $1.80. However, when looking to trade VIX calendar spreads this is not the case. Tony B: Serum's come down a little bit. Every little bit helps. Every single day. VIX futures calendar spreads represent a daily turnover above 500 million dollars, or roughly 20% of the total VIX futures trading volume. VIX futures calendar spreads represent a daily turnover above 500 million dollars, or roughly 20% of the total VIX futures trading volume. All right. Cboe Margin Requirement/NYSE Margin Requirement; Cboe Position and Exercise Limits for Equity and Index Options; Cboe Position Limits for Broad-Based Index Options The Cboe Volatility Index ® (VIX ® Index) is considered by many to be the world's premier barometer of equity market volatility. The reason I wanted to do this so bad is because I wanted to show you that you can find a situation which is the worst trade you can make from a calendar spread. Tom S: We figured out the risk over time was about $700. After a few simple algebraic steps, you can verify that the calendar spread's price is proportional to F(t, T 1 )-F(t, T 2 ) ~ bct where T 1 < T 2 (i.e. It's funny because the one time you wait, the next thing you know the stock's 73. Freakin' Netflix is up three-and-a-half dollars. Again, I'd like a little bit more. The reason you have a larger amount of risk is that different /VX futures trade independently to one another. Tom S: TP is going to do a segment called, "The Skinny on Option Modeling." Caught them red-handed. Tom S: 40, 41 call spread Improving Trading System Performance Using a Meta-Strategy, High Frequency Trading: Equities vs. Futures.  If you backtest strategies based on signals generated from the spread calculated using the last traded prices in the two securities, you will almost certainly see “phantom trades” – trades that could not be executed at the indicated spread price (for example, because both contracts last traded on the same side of the bid/ask spread). Tony B: 132, 130 [crosstalk 00:02:57] sold yesterday. Tom S: Yeah. Jules's going to do a segment on Girl Scout Cookies. The VIX is one such product. Sign up for a free tastytrade account to download the slides and youâll also receive daily market insights from our experts and a roundup of our best shows from each day. Tony B: Take a quick break, we'll come back! Tony B: Mm-hmm (affirmative). I have a lot of firsthand experience with this and the first thing we did... And these numbers are very accurate, because the first thing we did when we ran the brokerage firm was we went back and we studied... All Rights Reserved. Tony B: What any of these spreads would be trading for. Tony B: Now you can make a decision if you want to do it or not. Tony B: Got it. Tom S: No. Tom S: Everybody's getting skinny, that's right. Tom S: Some lost $3 million, some lost five, some lost 10, whatever it was, but this was the biggest industry loss. $636. Tony B: [chuckling 00:10:17] Tom S: Yeah. VIX options perform differently to regular options so keep that in mind. Calendar spreads, also known as time spreads, are extremely versatile strategies and can be used to take advantage of a number of scenarios while minimizing risk. Tom S: That makes you a little nervous. In addition, our max profit has skyrocketed to $162.90 if SPY closes at 148.03 on February expiration. Moves in the front month can be massive with very little change in the back month - especially as the contract nears expiration and /VX more closely resembles the spot price (VIX). Other than trading the CBOE Volatility Index (VIX) curve using VIX futures or VIX options, it is possible to combine the two instruments into a calendar spread. That's how you have to kind of think. The strategy on calendar spread in VIX futures trades the front two contracts on various trend-following & mean-reversion indicators to trade on daily basis I have been working on developing some high frequency spread strategies using Trading Technologiesâ Algo Strategy Engine, which is extremely impressive (more on this in a later post). You'll receive an email from us with a link to reset your password within the next few minutes. VXX : Trading Volatility â Experimenting With Diagonal Calendar Spreads Posted on July 11, 2012 by 30DayTrading VXX is pretty interesting product that is supposed to track the volatility index (VIX) futures , not the VIX itself.  The strategy applies a variety of trend-following and mean-reversion indicators to trade the spread on a daily basis.  I decided to take a time out to experiment with a slower version of one of the trades, a calendar spread in VIX futures that trades  the spread on the front two contracts. tastytrade is a trademark/servicemark owned by tastytrade. Today, Tom Sosnoff and Tony Battista look to put some numbers around this problem. Down money. Tom S: So now, it's up to you. You're listening to TastyTrade Live. I don't care what it is. tastyworks does not give financial or trading advice nor does it make investment recommendations. We this trade we have estimated coverage for the next 7 days between about 37 and 58. I kept saying that the show this Sunday that I'm doing is at 6:00 o' clock; it's at 7:00 o' clock. $5.8 million in customer losses from VIX calendar spreads and most other firms lost similar amounts of money. Tom S: We were worried that you were worried. Tony B: Mm-hmm (affirmative). VIX calendar spread - too good to be true? We've done calendar spreads all over the place and we already know you can't do it in the VIX. Tom S: A strategy we consider in low volatility environments is a calendar spread. A reverse calendar spread offers a low-risk trading setup with profit potential in both directions. A calendar spread takes advantage of the pricing differential that may start to develop between a front month option and a back month option. If the contango between months 1 and 2 is 10% and the contango between months 2 and 3 is 5%, couldn't we hedge out the contango to zero by going: Month 2: - 1 (+10 % contango) Month 3: + 2 (-10% contango) Tony B: What spread was that? We hope to loosen a lot. Still got a tight inside day.  Even so, this being a straightforward calendar spread, it should be possible to trade the strategy in size at relative modest margin cost, making the strategy return highly attractive. Supporting documentation for any claims (including claims made on behalf of options programs), comparison, statistics, or other technical data, if applicable, will be supplied upon request. Quiet Foundation does not make suitability determinations, nor does it make investment recommendations. Tom S: Very good, grasshopper. Tom S: It's a straight 100% mark-up. Tom S: Biggest loss over debit? Tony B: Mm-hmm (affirmative). Tom S: Okay. As a result, the net profit from the volatility changes alone is +$1.04 per calendar spread ($4.88 profit on the short call's price decrease - $3.84 loss on the long call's price decrease = +$1.04 ). Tony B: Meanwhile, the Nasdaq's down a $1.00. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastyworks. Tony B: It's less than $500, that's all I know. Tony B: Mm-hmm (affirmative).  On the other hand, while using market orders would almost certainly be prohibitively expensive in a high frequency or daytrading context, in a low-frequency scenario the higher transaction costs entailed in aggressive entries and exits are typically amortized over far longer time frames.