I was working with an option mentoring student today when we realized that SPX skew is at the flattest on the put side it has been in weeks. The calls are also relatively cheap. When we mentor option traders, we teach our traders to look at the10 delta put and the 25 delta call relative to ATM. Right now in the September contract the 10 delta put is trading at under 125% of ATM volatility and on the call is trading at around 85% of ATM vol. This is in significantly relative to where it was even at the beginning of the week when we did the State of SPX volatility. To top that off, ATM IV is also relatively light.
This is signaling a few things:
-We have priced in next week’s employment already
-They are working to price out labor day as fast as premium sellers can
-Trader do not seem to fear some sort of major collapse
As I have stated in the past, we are in a range of 1050-1100 plus or minus a few points in either direction, and we cannot seem to break out. We will if employment turns into a big surprise, but that’s about it for now. Traders forget that there is a direction besides up or down, it’s called sideways. I think we are in that range and skew and volatility flattening seem to be confirming it. These conditions are making butterflies in Sep or even the weekly’s seem very interesting. At the same time, the October condors no longer seem attractive to me based on both implied volatility and skew.
OEX SPX 1-5 Trade
To make matters more interesting the financials seem to be holding their IV better than some of the other industries, this could be why VXO is currently trading OVER SPX. This makes SPX a buy and OEX a sale. That’s right traders, it is time for a one five trade! I did not enter it today, but come Monday I will be looking to sell eleven of the OEX ATM straddle (the 485) in SEP and buy five of the SPX ATM straddle (the 1070). Our theory is the means will revert and we will see either a fall in OEX implied volatility, or a SPX will rise. If I had to guess I would lean toward OEX falling as I am currently bearish volatility despite all of the major omens out there.
In SPX our 5 straddle cost us 21125.00 It would look like this:
Our OEX straddles collect 21285.00, it would look like this:
Almost a perfect match! FYI, this trade has risks and we at Option Pit Mentoring are NOT encouraging anyone to put this sucker on, we just want our readers to see how pros might trade. I am sure these numbers will change, and if the trade goes away Monday we will not enter it. We will report back then.
Have a great weekend, don’t forget to find our YouTube page, I will be putting a surprise up there next week. Follow us on Twitter @optionpit, Check out the AM Pit Report, and inquire about our mentoring services (888) Trade-01.
charts from TOS and LiveVolPro
