OEX Calendar Spreads
Several commentaries ago I wrote about the fact that calendar spreads inherently profit if implied volatility increases.
The reason for this is that they have net positive vega–the greek that tells you how sensitive an option is to changes in the implied volatility. For this reason, I recommended you look for calendar spreads in underlyings on the Underpriced Explosion Lists–those underlyings whose options are already underpriced–but I mentioned that the OEX is a special case.
This is because OEX options are almost always overpriced. A OEX option calendar spread is certainly in principle vulnerable to a collapse in the OEX implied volatility (the VIX) to the level of the historical volatility, but such an event does not seem to occur.
So what criteria should you use for OEX calendar spreads? One natural approach is to look at the average implied volatility of OEX options in some recent time period, and call OEX options “overpriced” (read “vulnerable to collapse”) if they are near the top end of their historical levels and “underpriced” (read “low risk”) if they are at the bottom end of their historical levels.
This approach entails keeping or having access to a daily implied volatility record. In fact, it would be helpful to have this kind of record for all the various potential underlyings. This is tedious and time consuming to do by hand, but fortunately there is computer software that will generate these values and archive them for you. More on this later.