During the AM Pit Report, and during my first option mentoring session, there was actually a period of time where the VIX was not down enough to cover the change in SPX price. Basically, strike implied volatility had not really come in very much and quite possible was up. By the time we got to the mid-day report IV's had started to come in. By day’s end, SPX IV had officially been smothered, not quite to levels that we saw in early September, but certainly a break out of the IV range. This IV range has kept the VIX, adjusted for weekend decay right around 22.5 for the last three weeks. This could be the break out we have been talking about in the SPX for a couple of weeks.
October IV did come in, but as many of you know October is no longer a vega-centric month, it is the gamma that is driving profits and losses in October now. November, now the front month for all intents and purposes got completely demolished, December came in, not at the same clip as November however. For those interested November came in about 1.5%, while December came in less, January even less than that.
This is presenting a few opportunities for traders. With the IV this much in Contango, leading into a major announcement the short time spread might be a really good play. Here is why, with Nov already lost 2 points below December, if the number on Friday causes nothing, I would expect the Nov-Dec relationship to remain somewhat stable. This could allow a short spread to at least no lose into the announcement. If the announcement is gang busters either way, the November front months that are over sold should more than make up the differences in the vega's of the November and December. Add gamma into the mix and we have a winner.
For those that worry about the margin of the short calendar, I would strongly encourage that trader to open his or her eyes and realize that the world does not stop and start with equity based products. The ES options are directly correlated with the SPX and trade almost 24 hours a day. They may be a great way to put together a calendar trading business (after all, traders don't only trade one way). Read more about the ES options at the CME and make sure you do your homework on how the contract trades before trading these.
We are going to look at calendars and short calendars in tomorrow's AM Pit Report, do not forget to check it out. And follow us on twitter: @optionpit. Again, I would like to remind people to check out the podcast we are doing on TheOptionInsider.com, read my piece in SFO magazine, and please feel free to email or call if you have questions (888) Trade-01. For those that like the AM Pit Report, I would really take a look at a level 1 membership, the value for the product is off the charts.
