Option Traders, if you put your ear to the T-1 line that delivers your data feed I think you might have heard what sounded like a cross between like a overused Whoopi cushion. That was volatility getting sucked out of front month options after the Fed made its QE2 announcement. I have to hand it to the market, that weekly strangle was NOT underpriced. Another reason why it is usually a bad idea to buy this stuff when it seems too cheap.
It was very interesting to watch because implied volatility in the SPX came out of the options in a similar fashion to the way implied volatility comes out of an earnings play. In fact the same plays would have worked. Let's take a quick look at yesterday's IV's and front 3 month's term structures:
Notice how the months are really line on top of each other. Also, for the first time in a while the front month is more expensive in IV terms than the back month. We were looking at this play in during the PM PIT Report today and noticed there were several opportunities for calendars and double calendars.
As stated above November in the SPX seemed to stop decaying over the last few days as the market basically decided a straddle price for all of the news being released this week. Once the news came out, all of the decay that should have been coming out of front month options over the last week or so finally came out. This familiar to decay often confuses traders, or causes traders to think about IV as a function in time in all instances. It isn't...I think it is easier to think about a situation like we just had as a sticky straddle price over time stopping. One way to differentiate is to look at straddle price, if it increases in a short period of time, that is a true IV increase, if it simply stops decaying; we are dealing with a sticky straddle price more than IV increasing. Sticky straddle prices are very common going into stocks earnings. Only on rare occasion does IV truly explode or get 'bid up' into earnings. Take a look at where the IV's ended up today:
One may also note that the VIX got hammered, for once it was pretty accurate, and I would note however that almost all of the VIX movement was from November. December really didn't move. This is the classic example of how a gutsy calendar trader could have made a killing. Those time spreads were cheap. Not that they are back to normal, I will be looking fly's and condor's again.
Finally, I would note that IV probably got a little over done today. If I had a significant short vega position (which the hedge fund does have) I would spend a nice deal of time tonight looking for spots to close out. Especially in November.
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graphs from livevol
