VIX continues downward, SPX Weekend Decay Priced out Already?
I had several people ask me "How do I know the weekend came out?" The answer is look at the preponderance of the evidence.
1. No more news for the rest of the week: Fed decision was the last bastion of IV for the week
2. We are coming into a period of time where buy-writers are going to be selling their monthly roll. Market Makers want to get ahead on this curve
3. I know this sounds crazy but the NCAA Tournament is going to KILL volume unless there is a very good reason for it not to. Think about it from a trickledown effect
- Head Honcho Trader Goes to Watch Games leaves office, not trade gets sent to broker
- No order for broker to send to the floor
- Market Makers see no volume except retail sellers
- Market Makers take out the weekend as early as possible
4. The VIX was down over a full point at one time and there was 0 change in news for the market place. The information and uncertainty on Tuesday at 3:30 PM EST was the same as the information and uncertainty at 10 AM EST on Wednesday.
My proof is that today the market is moving even less than yesterday and yet the VIX is only down about .20
So what does that mean to the retail trader: simple it is not a good idea to sell premium over the next day or two. This is because the trader will not receive the theta that the traders system is modeling. Traders who sell premium will see their P&L flat line today and Friday, then when they come in on Monday thinking they will have collect premium over the weekend, the IV will be up. Thus the retail trader will have nothing to show for all of that short risk.
Traders that are looking to get long premium the trader has little or no decay to pay on his or her gamma for the next few days (there will be a small amount of decay by Monday). I am not suggesting buying straddles or anything crazy like that. In lieu of a straddle I would suggest a short calendar (sometimes called a reverse calendar). This goes back to term structure of the trade (I will be getting into that as I write my article tomorrow and Friday. Essentially, the trader will be paying very little to be long gamma in say the SPX over the next few days. When I was a market maker this was the side of the trade I liked to have on into these types of weekends.
The above sounds great, but for most retail traders this might be the most useful thought: if the trader is looking to enter a debit spread, today is a good day to do so.