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THERE IS NO SECRET!
That’s right. For directional trading models, there are only a few tried and true dictums that can provide consistent profits over time. The “Trend is Your Friend” and the absoluteness of mean reversion are two which Scotia holds dear and practices religiously.
There are thousands of ways to recognize and employ these truths in order to be profitable. Rigorous testing protocols and simple trading rules can help to make the system work over many kinds of market conditions but the key to successful trading is to follow the rules once the system has been deployed. The market sometimes tricks us into thinking it will close up or down and then in the few minutes between the time we enter our trades and the actual market close, it moves in the opposite direction. This happens for us a few times a year. But, apart from the market making our anticipatory trades wrong, we have never disobeyed the rules of our trading systems. If the rules say to make a trade, we do. If the rules say to close a trade, we do. If the rules say not to make a trade, we don’t. This kind of consistent use of the entry and exit rules of our systems mean that our system will do what it is designed to do. It may one day not work if market conditions change in a way we have never seen, but until that happens, accounts assigned to a particular Scotia trading model, will get exactly what that system offers, good or bad.
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Purchasing calendar spreads is one of the ways we can create some long exposure to volatility. In other words, all else equal, when volatility increases, our portfolio’s market value increases when we hold a calendar spread. In the parlance of options trading, being long a calendar spread is a long vega position. Being short a vertical spread is a short vega position.
A calendar spread involves selling a near month option at a certain strike and buying a back month option at the same strike. Generally speaking, when we enter a calendar spread, a debit to our clients’ accounts is created. We are using cash to buy the spread. This results from the fact that the IV in a back month option at a given strike is generally higher than the IV in a front month option at the same strike. So, in this case we are buying more volatility than we are selling, and we are buying more time premium than we are selling. As a result, what we are buying costs more than what we are selling, leading to a net debit to the account.
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