When I think about “crowded trades” I think of a position much of the hot money is jumping on.
Many times early in ones options education traders will not quite know how to interpret the VIX and volatility. For instance, on a day like today, with the VIX down, many of my option mentoring students would think that volatility was down; it was not, in SPX options. Yes, VIX futures did sell off a touch, but the IV of SPX options themselves actually increased. We can tell this by looking at strike volatility rather than using a weighted index.
If we look at an OTM put, an OTM call, and the ATM call one can actually see the movement of IV today...up (each zig is a date):
The announcement by Super Mario to “do what is necessary” is a welcome relief for the markets. For the most part, the volatility markets, which I watch closely, have been balanced on a knife edge of moving sharply up or down. Today the move is distinctly down. One name I follow has pretty much ignored all of the activity recently, Walgreens (WAG).
Two years into the Euro Crisis and the only thing I have to show for it is a joke. How long does it take a Euro Finance minister to screw in a light bulb? Two years and counting…. Anyways, the strange state of the equity markets usually spill out into the volatility markets, and today was not a whole lot different.
One of the things I teach my option mentoring students to do is to watch for when traders are buying/ selling premium. It's one of the greatest tools a trader can gain during his or her option education. While everyone is probably out there panicking about the deterioration in the Euro, how bad the US economy is, and AAPL earnings, I am wondering whether today might be at or near a short term bottom. Here is why: Premium is being sold today.
I semi-regularly to a segment called three VS Trish on Bloomberg TV. I usually try to come up with some sort of simple option play against a trade idea. For those of you who caught my segment on Bloomberg today, the discussion was about ways to trade the Euro against the dollar. Here is the video:
Google taught my options mentoring students a nice lesson on getting long premium into earnings; it usually pays to play the day before earnings, not the day of. Because the ATM straddle that was purchased on Wednesday was a huge winner, while the ATM straddle purchased yesterday was a loser. Thankfully, most students actually had on the long calendar we looked at during the pit report, so they all came out ahead.
With the earnings season coming into full swing and going a bit better than most expected, I thought it would be a good time to dissect a trade we did at Option Pit that did not work out quite as we thought it would. Usually, when I lose money on a trade, I like to go back and see if there is anything I missed. For the example below, it was relatively simple, but it is a good exercise to figure out what went wrong.
At this point what has happened to corn in the midwest is somewhat common knowledge and is finally starting to be noticed by those on the east cost. Traders, once the east cost figures out that corn futures are near all time highs and that there is a big suply squeeze, that means the move in corn is almost over.
While the New Yorkers were worrying about europe, smart Option Pit readers were short puts or long calls, or heck long the the physical in either corn futures or in the ETF CORN. If you missed it, take a look at the chart: