The market ping pong continues. The SPX and SPY have no conviction in either direction. I expect short term IV to rally because we are nearing the top of the SPX range of about 1100. We may sell off a bit more down to the 1020-1040 range, with the VXX running back up near 30. This ping pong has finally caused skew to flatten enough to make me change my mind about butterflies and iron butterflies:
For the last few months I have been saying that butterflies have been a bad trade. The reason, wing volatility has been too steep to make the risk reward seem worth the trade. Today, I during the Afternoon Pit Report, we were looking at skew in the SPY and realized that it was no longer unfavorable to enter a butterfly. Notice I did not say favorable, I said not unfavorable. I still am not in love with butterflies but now that skew has flattened while at the money implied volatility has remained somewhat stable. Units vol is still a little pricey, but also somewhere with the proper range where if the market drops 40 handles (points) the trader will get lots of protection. During the Afternoon Pit Report I put on 3 different butterflies each with different characteristics. The intent is to see how these perform of the next few weeks.
As far as condors, I do not hate condors, but they have become less favorable in my eyes. Once skew flattens these condors become open to implied volatility skew steepening. I do not see this as a big risk, thus I still like them, just not as much as I used to. This is one of those things traders need to realize; when butterflies are great condors may not work as well and vice versa.
Again, don't forget to sign up for the AM Pit Report, I am discussing trading and answering questions of the general public.
