One of the things we have been focusing on with our option mentoring students is trading what is given to you. So what is the market giving today's option trader?
I think there is a lot of pent up fear of tomorrow employment report. Why? I am not sure. However it is there. It is the reason that volume has been light, it is also the reason that implied volatility has remained as high as it has. Here is what I mean, if traders take a look at the realized volatility of the SPX over the last 10 days, what that would be: 12%. 12%!!!! Do you option trader know that last time we had a type of volatility of 12%?? Let’s put it his way, it has been awhile. This is where IV can show its ugly head, unless traders take the right steps.
For starters, looking at the recent movements of the SPX in both IV and Price, we are at the peak since the flash crash.
If the number is good tomorrow we could be heading back toward 1200. If the employment number is ugly, expect us to head back toward 1050 pretty rapidly. Basically, IV is not staying here, we are either going to rally up in the slow fashion we have been having, or we are going IV may explode back to 30 or so.
Looking at the implied volatility curve of September options the 10 delta put is set at right about 130% of ATM IV. The 25 delta call (yes we look at upside sometimes as well) is at 90% of ATM implied volatility. The put side is not especially steep, bordering on flat, at the same time, the call skew is actually extremely flat.
In any case, IV is way over HV, and the flat skew makes me think we that traders are not sure what to think right now. Based on this the trade that would have seemed to make the most sense going into tonight was butterfly with a flattened delta, and a off center strangle overlayed upon it. I think this trade would have put the trader in the best position to win. Tomorrow may present thing differently, currently the fly is about the only trade I would be favorable to me.
FYI we are doing some real digging into Time Spreads (calendars), while I would say our teaching is revolutionary, I think we may take it a step further in the coming weeks. The more we work through things at Option Pit, the more we realize that we are the only mentoring program out there actually trading, and teaching potential option traders how the real market place works. Have a great day, good luck tomorrow, call us if you have questions (888) Trade-01 or email Mark@optionpit.com
