JasonW

Okay, so the last I checked the VIX was trading around 14. Though I agree this is low, it has a way to go before it gets to danger territory which I'd define as around 10. But even that is no guarantee of an immediate reversal. I'd also point out that it is continuing to post lower lows and lower highs which is a guidepost for a bearish security or index. I'm not saying it will go lower. I'm just saying I've seen no real evidence that it is staging a long term uptrend as of yet. Spikes will always occur, such as we just had in late 2011. If you're really sure the VIX is going to spike up within a reasonably short time, you could buy a straddle. Of course being negative-theta averse I'd personally opt to keep the expirations distant. The advantage to this kind of trade is you can wait in the wings for the spike in volatility that will push the prices into the profit zone and snap the trade closed whenever that happens.

Good point ntrader. In fact the bull call spread with a deep ITM long and a slightly OTM short is quite covered-call like, but with fewer resources tied up. From my perspective the downside is the relative lack of positive theta caused by the long call. One reason why I've generally just kept with covered calls. But I'd like to experiment with a deep ITM call on the long side that is out an additional week. So this would significantly reduce the loss to theta especially near expiration. Ideally both the long and short sides would be rolled to the next week on Thursday when the new options come out. Of course the long side will be rolled out to a point 7 days behind the short call. Also any adjustments to the strike could be made here. So this is basically a bull call spread with a slight 'calendrical' element thrown in to improve positive theta. The advantage over a pure calendar spread (long call distant expiration, short call close expiration, same strike) is that the risk to capital from premature exercise is reduced since (a) the expiration time differential is reduced and (b) the long call is deep ITM which has less time value.

Something I'd like to point out regarding Warren Buffet: What he reports his analysis to be and what he actually uses may not be the same. We certainly know it is not in the interest of a successful investor or trader to divulge his or her actions in real time (say you're trying to offload 500,000 shares of INTC, do you want to go on CNBC and announce that you're doing so?) But extending this out further it is questionable if they would even want to divulge their true techniques. Do Warren Buffet and George Soros really want to have more of their own kind to compete against. Buffet claims that he is completely indifferent to price movement. But is he? Would he tell us if this were untrue?

True but it was even lower in 1994-1995 which actually preceded a four year rise! Not to say this will happen again, but we should remember it (a) can trend even lower for months or even years and (b) when it rises again it can do so uneventfully (1996-1999) or violently (2007-2009). I question whether the VIX at it's current level is particularly actionable.

I'm worried about premature exercise of American style options on any calendar spreads. Let's take a simple example. Suppose I've put on a SPY calendar call spread with same strike with the short side expiring in five days and the long side expiring in about a month. Obviously the basic idea is to make money on the faster time decay on the short side compared to the long side. Yet suppose the stock suddenly goes into the money while I'm not watching and - adding the fatal blow - the counterparty decides to exercise the short option. Then wouldn't the OCC exercise my side to honor this counterparty's request? This would incur potentially large losses since all of that time value on my long option would be lost when it is exercised. A reality check, first of all: Is this the true situation. Is this what OCC actually does? (I've never done calendar spreads before so this kind of thing was never an issue) Also, does it make any difference if the options are cash settled? Finally, is there a way to avoid the exercise of my long option? I just want to honor my side of the contract by buying and supplying the stock (or cash equivalent) at the specified price... I definitely do not want to exercise the option losing all of that extrinsic value.