Front month and back month in options trading

Q: A couple of weeks ago I purchased the Trading Pro System and also subscribed to the Daily Market Advantage.

You have provided an unbelievable resource and I am still working on paper trading and learning the adjustments on the iron condors and Calendar spreads. It is very interesting information.

I have watched the video on the Victory spread strategy several times. In attempting to utilize the strategy in the video I am not currently finding trades that match the low downside risk demonstrated in the video.

It seems currently many options front month I.V. is lower than further out months – I am not sure if this is affecting my analysis of the trade. I was also wondering if the relative close time until Oct expiration affects the outcome of this strategy? I did try numerous examples with selling either the Oct or November options.

Do you have any current examples of the Victory Spread strategy that could help me understand what I am missing or do I need to wait until after Oct expiration and then retry my analysis.

I greatly appreciate your expertise and enjoy listening to your market review each night. Keep up the great work.

A: The front month (Oct) has only 8 days left- that is the reason you cannot find any trades. There’s no time premium left in the front month.

The general rule is: Never use a front month with less than 30 days remaining.

In addition, the Vol will give you different risk profiles that may not be favorable. You want the front month to be a slightly higher vol than the back month.

A trick to finding those types of trades is to look for a stock that has sold off hard. For example – RIMM (on 9/25/09)

It lost about 15+ points in one day skyrocketing the front month Vol while the back month had a lower Vol.

The setup was very favorable at that time – it’s too late to do it now.

So use the 30-40 day month options and find stocks that have that positive volatility skew.