With its 30-day historic volatility ranging between about 20% and 30% over the past six months, and implied volatility tending to stay above historic volatility, the Retail HOLDRS ETF (RTH) is a good candidate for a calendar spread. Implied volatility for RTH currently rests near its nine-month low. Moreover, July-expiration options are available for RTH, which means we could buy a one-month spread and avoid the higher vega that’s currently punishing our EEM June/Sept spread.

The Thesis

With 36 days until June expiration, this is a good time to open a calendar position. At this point in the cycle, we’re considering single (one strike) calendar spreads; however, single calendars are best opened at the money, and RTH is trading just about dead center between the 95 strike and the 100 strike. With economic conditions still questionable, we don’t want to be bullish and use the 100 strike, but the strength that the market has been showing is reason enough not to be too bearish and pick the 95 strike either. Therefore, we’re going to make this another double calendar.

The Trade

Were opening the following double-calendar spread on RTH:

+2 RTH July 100 call
-2 RTH June 100 call
+2 RTH July 95 put
-2 RTH June 95 put
for a net debit of $2.35.

Our break-even points are at $93.40 and $101.90. Target profit is $0.35, and our stop-loss is $0.40—but we expect to be able to adjust the trade long before getting there. As with our EEM double-calendar, we’re trading an even number of contracts to create a position that can be split if adjustment is needed.

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