Practice Trades Cal 1.3 – 1.6

The following four practice trades are backtested over the following market price action:

Conventional wisdom would label this a bad time to place time spreads with IV so high. How do you think things will turn out?

Cal 1.3 (guidelines here) begins 3/16/20 (60 DTE) with SPX 2409 and 2410 puts -$168 (-2.3%). MR is $7,268 (two contracts), TD 85, IV 78.5%, horizontal skew +7.2%, NPD 1.5, and NPV 196. Some of these numbers are staggering: IV, horizontal skew, and MR (probably due to the options being packed with so much extrinsic value).

MDD is the very next day with SPX up 1.35 SD, IV 70%, and trade -$178 (-2.5%).

One day later at 58 DTE, exit trade for profit of $1,472 (20.3%). SPX down 0.19 SD with IV down 5% over the two days. Horizontal skew has decreased to +5.3%, which has certainly contributed to the end result.

Cal 1.4 begins 3/23/20 (88 DTE) with SPX 2254 and trade -$168 (-3.5%). Only 25-point strikes are available in the back month, which does not fit the guidelines. I will therefore add the additional guideline to buy back month at the first strike OTM if same strike unavailable. MR is $4,828 (two contracts), TD 17, IV 60.9%, horizontal skew +2.2%, NPD 2.4, and NPV 126.

On 85 DTE, trade -$788 (-16.3%) with SPX at 2632.

Exit trade at 79 DTE for profit of $642 (13.3%). Over 9 days, SPX up 1.02 SD with IV down 8%. Horizontal skew has increased to +2.8%. TD 146 suggests market could move around quite a bit before hitting adjustment point.

Cal 1.5 begins 3/30/20 (81 DTE) with SPX 2629 and trade -$168 (-4.3%). MR is $3,948 (two contracts), TD 62, IV 52.8%, horizontal skew +2.5%, NPD 0.8, and NPV 156.

Exit trade at 76 DIT for profit of $532 (13.5%). Over 3 days, SPX down 0.83 SD with IV down 11%. Horizontal skew has decreased to +1.4%. TD 13.

Cal 1.6 begins 4/6/20 (74 DTE) with SPX 2671 and trade -$168 (-3.2%). MR is $5,208 (two contracts), TD 31, IV 38.6%, horizontal skew +0.7%, NPD 1.2, and NPV 165.

MDD is hit next trading day at -$308 (-5.9%) with SPX nearly unchanged at 2672.

Exit trade at 59 DTE for profit of $1,182 (22.7%). Over 15 days, SPX up 0.30 SD with IV up 7%. Horizontal skew has increased to 1.3%. TD 362.

Horizontal skew can be confusing. Based on numbers alone, I would ideally like to buy it positive. Once in the trade, I want horizontal skew to decrease, which means the long leg remains expensive relative to the short leg.