Condor Options

Volatility Tracker for July 13, 2009

On the equity front, I continue to expect flat-to-downward price momentum for the summer. Volatility futures have been pricing in a higher level of implied volatility for the late summer for quite some time – a fact to which “green shoots” proponents would do well to attend. [7]

I want to call your attention this week to the situation in gold and oil.  Crude oil futures fell from a recent high of $72.92 on June 11th to close Friday at $59.66 – an 18% decline in one month, with nearly all of that decline coming in the last seven sessions. It’s no surprise then that oil looks oversold on a technical basis, [14] or that implied volatility in oil spiked this week. [3] I’m not prepared to call a short-term bottom in oil, but I do doubt whether it will be much lower than this by August expiration.  The USO Aug 28/30 put vertical can be sold for about $0.52 with the following greeks [11.06d -1.53g .43t -.83v].

The situation in gold is similar: while price action hasn’t been as dramatic, precious metals all look technically oversold and should be hitting major support soon. [10]  Equally important is the persistent relationship between implied and realized volatility in gold over the last several months: option sellers who keep their directional exposure in line have been well rewarded. [11,12] The GLD Aug 83/85 put vertical can be sold for about $0.30 [7.5d -1.33g .43t -2.16v], but should be kept reasonably market-neutral.

Short-term S&P 500 Implied Volatility Bias: Neutral
Disclosure: may hold positions in gold and oil similar to those described above in managed accounts.