It has been a crazy month of trading...or has it. The buzz word at Option Pit Mentoring has been the Hindenburg Omen. Mentoring students keep saying that they think the market is really moving around. Is there a good income spread? Should we trade Butterfly's or Condors? What about diagonals and calendars? I thought it was time to take a look at the State of SPX volatility and see where we are really moving?
SPX High-Low 10-day Volatility: Save a major move on August 11th (coincidentally the day after I did the last State of SPX IV). The high love volatility would be much lower. The 10 day high Low volatility is 28.7%. Instead of 10 days, if the trader follows 20 day realized volatility, the 11th is still the largest single day move. That realized volatility over 20 days volatility is 22.1 much more in line with what I am seeing from the market place. In fact in order to find a day as big as Aug 11th we would have to go back to July 16th.
SPX 10 Day Intra-Day Volatility: 21.55% this equates much more to 20 day than the 10 day vol. Looking at a volatility of 21.55% or the 20 day of 22.1 we should get a daily range of 30 points about once every 20 days. We are not even seeing that much movement right now. What does this mean, not that Aug 11th shouldn't happen, more that it is an outlier, not the norm and may be throwing off our stats a touch.
SPX ATM Blended IV:
SPX Sep ATM IV: 21.87%
SPX Oct ATM IV: 23.7%
SPX Blended ATM IV= 22.24%
Believe it or not this is right in line with the way the market has been moving, if anything it is a little low. That generally IV ran about 2% higher than realized volatility. That number has been running at more like 1-1.5% over the last year or so.
SPX Put Skew: The 10 delta put is currently trading at about 130% of ATM IV in September. In October the skew is quite a bit steeper at 140% of ATM IV.
SPX Call Skew: The 25 delta call is trading at about 89% of ATM IV in September with October trading more steeply at 86%
SPX Term Structure: I have said this a few times. LOOK at the ATM IV spread: its almost 2%. That is incredibly wide and asking for traders to sell this spread. The trader will make money on any move similar to Aug 11th; in fact, the trader will make money on a move like last Thursday. If there is any real opportunity in traders right now it has to be this trade, doesn't it?
To tie things together: I think butterflies look okay right now. The low vol bothers me a little, but the flat skew should make them workable. I think a unit or two would make sense. I am not loving October condors the skew is okay, the IV is low and we are getting inside of 50 days. The 19th was a great day to sell IV if the trader had the stones to do so. Double diagonals look awful, and calendars look great...if you want to sell them.
I will be doing a nationwide tour over the next few months. For my schedule email me Mark@optionpit.com, or if you have interest in me coming to visit your city, and speaking to your Option Club or meet-up let me know and I will gladly make time. Do not forget to check out the AM Pit Report. It is free and informative, those that have been attending seem to be enjoying it.
Finally, the new issue of Expiring Monthly: The Option Trader's Journal is coming out TONIGHT. If you are not a subscriber, you should change that. This month we are exploring options on commodities and the Weekly Options. It's only 99 bucks a year and is a great read!
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graphs from LiveVolPro
