One thing I know I will get from my option mentoring students is a lesson on how they track whatever stat they follow. Some look at charts, some look at IV, some look at ratio’s of all different types. One that got sent via email from an option mentoring student of mine actually piqued my interest. The trader sent this along:
I track vol on my spreadsheet. Close-close, close-high, close-low, and high-low. We just had our 3rd consecutive trading day with <1 SD by EACH of those measures. I went back and looked; we had one 3-day period in Aug, one 3-day period in Jul, and one in Jun. None of those made it to 4 days, and none of those had multiple sets of 3 days.
Certainly, I do not think anyone is shocked that this had happened. The last 3 days have been about as boring as they come. Part of the cause was the Jewish and Muslim holiday’s, part of the slowness was because it is a slow news week, finally, I think when we get these oscillations up there has to be attempts to break through. Currently, the market has tried to break through 1120 in the SPX, and below 20 in the VIX. It has failed thus far, with a busy week ahead; I do not expect us to make it through the beginning of next week without a 20+ point move in the SPX.
My guess, the move with be to the down side, this is based on Contango, and now confirmed by something else: professional customer paper flow. I thought it would be interesting to see if there was any strange activity in the market today. There was: the put’s traded to calls traded ratio on the indexes and etfs was through the roof today. Take a look at two of the most actives, IWM and EEM (along with a few other ETF's).
That is an incredible amount of volume and very one sided paper flow, especially when the market is up and volume is way down. There are pro traders aggressively buying puts in these issues. The SPX, RUT, OEX, QQQQ, NDX, MNX all had similar ratios of trading. This actually makes some sense. Implied volatility is low, skew is actually really low. It is the perfect time to swoop in and buy puts. When pro traders are betting that the market is going to be falling, I tend not to bet against them. More often than not these guys are right. When all of them seem to be saying the same thing, I may not bet with them, but I will not bet against them.
The trade I suggested in the SPX for TheStreet, could easily be recreated in EEM or IWM and could have very good results. It may be a trade that we end up trying to follow in the AM Pit Report on Monday (assuming the market doesn’t tank in the morning). The only income trade that makes sense right now is a butterfly with maximum insurance.
I hope everyone has a great weekend. I’ll do state of the SPX and a mailbag in the very near future. Get those questions in to me mark@optionpit.com. For those of you that like my writing and the AM Pit Report, consider a level 1 membership to the site, it is loaded with benefits most importantly of which is at least 6 hours live content in the Mid Day PIT Report and specialty classes a week. Plus you get equity arb, the trader’s text book, and our message board. This for about 1/10th of the cost of what a trader would have to pay elsewhere for less content. Sign up here Option Pit Level 1 Membership, and if you don’t like the content, in the first 30 days we will return your investment in yourself.
