The SPX straddle has been oscillating around the current price for what seems like weeks. Traders that sell butterflies and straddles that have the ability to let a position run are making a killing. The problem with that, I have had trouble finding a single trader that has been able to withstand the highs and lows of the market place. Here is the problem,
SPX daily volatility (intraday volatility) =27%
The High low volatility over the last 10 days=36.6%
SPX ATM Straddle Implied Volatility=23.1%
If we take more historical days into account the SPX becomes murkier rather than better. This is because the high low volatility gets better, but the intraday volatility actually gets worse. This would drive just about any income trader mad. By the time the trader is done adjusting the downside, the trade bounces back and threatens the upside. The trader fixes that, or hits max-loss and then the trade falls right back toward the original center.
This also explains why skew remains elevated on the downside. The downside is super pricey. To pay for the puts, traders are UNLOADING on SPX upside. The steepness of the spread between calls and makes trading flies problematic as well. The calls are practically worthless, and downside seems to actually get worse when prices fall.
Traders that insist on setting up butterflies should look to overlay an off center strangle, moving the calls even closer to ATM than normal. That is the only way the trader will receive help on the upside. It may also insulate the downside. Believe it or not the only way, in my opinion to successfully trade a butterfly is to give up some early decay, and hopefully pick up some cash in skew staying steep and volatility falling, or the center (meat or thorax) of the fly fading faster than the wings.
Traders, there are a lot of experts out there probably steering you toward butterfly's. Right now unless I see the perfect circumstances, I am taking a pass. They just look ugly.
I hope you traders enjoyed the first PIT Report this morning, we are still working on the formating to get it to the free accounts live. Until then I will have it posted by 9 am. There will be more updates coming to the front end. Expect only the best from Option Pit.
Finally, the new issue of Expiring Monthly is now available for download. If you are a subscriber download it. If you are not, Subscribe here: Expiring Monthly
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