As the SPX continues its rally though 1630 and toward 1650, may a novice is asking why the VIX isn’t touching all-time lows. The answer is simple: volatility
When the VIX got to its recent low realized volatility was in the toilet. We had been through about 2 straight months of nothingness. 10 Day HV was near 5 and both 20 and 30 day HV were near 10%. Looking at HV now we can see a clear difference. 10 day HV is closer to 10% and 20 and 30 day are actually trading at a premium to VIX.
At Option Pit, our goal is to teach our option mentoring students not just the strategy, but the theory behind why one would execute a strategy. We want our option traders to learn how to construct their own trades, not just regurgitate others' trades. Learn more about how we teach here. Here is an example:
Many of my option mentoring students LOVE AAPL. AAPL might be heading for some real problems here in the near term. If not problems, at least some serious volatility. How can I tell? While some traders will point toward the stock breaking its 50 day and 100 day moving averages, I would point toward something else, volatility. Since AAPL stopped whipping around in the spring and bottoming out in May, the stock has had two major characteristics:
1. The stock has almost moved in a straight line higher
2. The Option Volatility has been relatively low
Today, the Option IV officially broke the high since AAPL took off in mid May:
As we stated on our blog Friday, the two things that really determine the success of a long calendar are buying low volatility and a tight spread. For those of you who have been at this a while though and trade calendars, it is really just this: Price. A calendar that is too cheap is likely to win, and over time, trading calendars will win big. Let me be clear, I dont mean inexpensive, I mean, cheap; in that, the calendar should cost more than it is currently trading for at a given time.
What makes a successful calendar spread? It's actually pretty easy to figure out:
1. Buying low overall Implied Volatility
2. The right spread between months
In other words, being able to buy the back month option for a cheap price and then, relative to the back month option, being able to sell the front month option for an expensive price. Here are a few things that don't matter:
1. The time frame of the trade
2. The Theta (if you are using spreads as a theta play and not trading the vols, you will lose)
3. What months are bought and sold
Calendar spreads can pop up in odd places in some of the most active names. For instance, take a look at December IV vs Jan IV in AAPL:
The animal spirits seem to be back in a small way across the equity markets today. As I write this today there is a nice dispersion of stocks moving up and down and that is a welcome relief from the crazy correlations the market has been experiencing of late. Coming off of the 4th of July it also makes me think of a nice frosty beverage. BUD is looking like a tasty treat. How so?
When viewing the market, many people look at today as a sigh of relief. That the world will not end and all is well. Personally, I don't see it. While there is talk out of Europe that a deal might get done, I do not think the markets are quite as comfortable with the movement as one might think. For starters, as I write this, IV in SPX options was down more yesterday than it was today.
I promise this will be one of the only Facebook options posts I put up over the next few weeks. However, I wanted to make sure that I pointed out a few interesting tidbits about options on facebook that, maybe, the average retail trader might not have noticed. Stuff everyone should know before reading the rest of this piece:
As our February Gold Class prepares to take their last class on portfolio risk management, it caused me to take pause. Good risk management can mean many things to many people.
Some consider risk management the process of managing winners and losers. If they have an iron condor, butterfly, calendar, or any host of trades, and traders keep their losses to a minimum and take off winners, that is proper risk management.
Others consider it having high acumen in adjusting trades. If a trader can convert a single butterfly, into a double, triple, or even quadruple butterfly, that is good risk management.