Option traders, one of the way's I judge where implied volatility is trading is to look at ATM straddles. In the SPX the straddle closed at just over 46 dollars:
That might be cheap, it might be expensive. It depends how much time there is to expiration and how much the SPX has been moving around. To me, this is clearly cheap. Why? Take a look at the range of the SPX since Monday along:
Notice that the SPX has had a bigger range in the last 4 days than the straddle is pricing for the next 27 days. To me that seems INSANELY underpriced. Today, on the live show of The Option Block (my bi-weekly podcast), I could not find one person on the panel that would be willing to sell this straddle. While IV is still, in relative terms, elevated in relation to where it was one month ago, it is not cheap on any level. I consider it oversold, especially considering all of the debt talk. And I don't necessarily mean that IV is going to rally. I simply think that from here, the SPX can make 1390, if a good debt deal is reached, and will blow through 1300 if a vote falls apart. I am normally a bit of a seller of premium, but I just can’t bring myself to do it.
For those that think the SPX is going to reach new highs, a short time spread makes a ton of sense. This strategy will do will on price movement and a drop in IV. For those more bearish I would strongly suggest a straddle. This strategy will benefit from rising IV and price movement. The only trade I would not do here: The Iron Condor. I personally put on a small SPY straddle during the Pit Report because I thought IV was so inexpensive. I am in the very near term an IV bull.
We are presenting a new version of the A Trader's Guide to Volatility! If you missed the first volatilty course, this is your chance to catch it live. It is also updated to discuss currencies, commodities, more of the VIX etns and Vol Contract Futures. Register here: Volatility Course. Sign up for our L3 services and this course is FREE. Sign up for L2 and I will give you the recording of the OLD volatility class for free (still a great course). Email or call us for more information.
Follow Us on Twitter: @optionpit
Graphs from TOS
