Trading Options in Turbulent Markets: Master Uncertainty through Active Volatility Management, 2nd Edition

Chapter 18

Calendar Spreads: Trading Theta and Vega

Market-neutral strategies and their close relatives—long-short, relative-value, and option-spread strategies—have long held out the promise of high returns, low drawdowns, and low volatility. These strategies tend to grow in popularity when a financial calamity results in both volatility and wider market spreads. Normally, a period of comparative market calm and stable correlations between markets follows, and at that point spread strategies appear almost too good to be true. Traders and investors alike envision hedged portfolios with fat spreads and a high likelihood of those spreads conveniently and profitably converging at expiration.

In the mid- to late 1990s there seemed to be a wide variety ...