At Option Pit Option Mentoring one thing we focus on is chosing the right trade for the right situations. We dont want our option mentoring students married to one index. Right now we are starting to get into December condor range. Personally, I usually lean on the SPX (thus I don't write the State of the Rut as a regular column). However, when I looked at the SPX I noticed a few things that made me think the SPX might not be the best condor right now.:
1. Today was the biggest implied volatility crush I have seen in some time. Adjusted for weekend decay, the VIX was down well over 2 point, almost 2.5 points.
2. VXN and RVX were down similar amounts
3. The VXO was barely down, and the VXV (S&P 500 90 day vol) was actually up.
This led to an increase in November and December Contango. A spread that was somewhat big (around negative 1) got close to 2 percent and ended up being about 1.5% wide. Believe it or not this still bodes well for condors if the back months are still higher. The December we want to sell did not get smoked the same way the November (where we have our current condor) did. While all of this makes it seem that condors aren't a totally awful idea, that doesn't mean the SPX is the best sale (if you think this Contango is bad, look at VIX futures).
When I judge condors I look at four things:
-Implied Volatility
-realized Volatility
-Skew
-Contango
Which condor makes the most sense? Without running through the math for you guys I (we do that During the Pit Report) I would say it is certainly not SPX, it has low IV, low skew and only decent Contango. Meanwhile the RUT has higher IV, higher skew, and low Contango. The OEX though, has higher vol than SPX, steep skew, and a good Contango. Currently the NDX is trades more like APPL than it does an index, thus I hardly even look at that index anymore. Although it too has slowed down. This is the trade I think is the best and the trade we put on in the AM Pit Report. To follow along register for an account at Option Pit.
SPX-OEX Swap
I actually think the SPX got over sold. There is rarely a good reason for the SPX vol to drop below OEX vol, thus we entered a straddle swap. We entered when the VXO and VIX looked like this:
The VIX is not supposed to be almost 1% below the VXO. That is usually a real opportunity to put on a 1-5 swap. We do the math and basically one is supposed to sell 2.2 OEX for every SPX. That amounts to a trade of sell 11 OEX straddles and buying 5 SPX straddles.
Here are the fills:
We will follow this trade for the next few days:
So now, we are doing one fun trade for the blog, one good trade in the AM Pit Report, and several in the Mid-Day Report. Follow us on Twitter@Optionpit
