Today was an interesting day for the volatility complex. While the SPX enjoyed a huge up day today in anticipation of a vote of confidence for the current Greek government, I could feel the trading tension. While I went out short a lot of volatility (via long VXX puts), I felt a lot of fear about holding my position overnight. I could feel the tension in the air as I spoke at the CBOE today. All of the traders were buzzing about. Tonight, with the passage of confidence, I think it is time to talk about how we expect VIX and SPX options to move tomorrow.
SPX
I would expect premium to be sold early and often. I am also thinking the SPX pops a touch, or, at a minimum, does not drop. I think the best trade in SPX is credit spreads and possible condors (if you can get in early). We could see a day opposite of today, flat to down with IV crushed vs. today where we were up big and IV held strong.
VIX
What could be even more interesting: Leading into the announcement tonight, the VIX really didn’t sell off, nor did the VIX futures. In fact, adjusted for price, the VIX was closer to unchanged than down.
Meanwhile, VIX options were still enjoying an elevated implied volatility leading into tonight’s announcement, and Skew in the options has been quite elevated as well:
Tomorrow expect the underlying to fall, IV of VIX options to fall and skew to get flattened like a pancake. I think the red which is July will fall to where August (the yellow) is trading, while august falls even further. The trade early in the day is going to be sell calls in VIX early, and then buy puts instead once the market crushes the IV and skew enough. I think calendars could be interesting as well as the VIX futures contango should steepen significantly tomorrow.
If executed well, traders should be able to profit quickly. It may be worth it to hold short options through the fed and up until Friday morning. At that point, I think we may not only see the weekend out, we might see the 4th of July priced out of options. There is serious risk of the market OVER selling premium in the next few days. The key in is to sell premium in front of the 4th, and then buy it back and possibly even be willing to go long if things get cheap enough (don't worry, Ill probably talk about it if I think premium levels are too cheap).
Thanks to all who caught my CBOE webinar today. Don't forget that there is a FREE webinar here tomorrow. During that webinar I will give away a prize worth almost 1000.00!!! I will also give everyone our free Expiring Monthly best of issue.
For those that missed the first butterfly webinar you can catch the replay here. You can also see April's Directional Class and March's Calendar Course.
