Condor Options

It’s been a quiet week in Lake Wobegon…for strategies that buy volatility, like Calendar Options. S&P 500 implied volatility continued to test three-month lows but stubbornly remained above our entry-trade criteria based on its 6-month range, while very short-term (5-day) realized volatility stayed relatively high. We have until Friday morning to open an August position, and we’re looking for some some indication of whether the S&P can break through the huge 1105–1120 resistance zone, which was first established last fall and has remained significant right into the current month.

Many technical analysts were predicting that a breakout above S&P 1100 would trigger a flood of buying. That breakout occurred Friday, but even after this morning’s housing-fueled rally, the market continued to show hesitation at this important technical area. Since then, buyers have come back to drive stocks up, breadth is strongly bullish, and SPY implied volatility is finally down into our buy range. However, overall volume is running below average, and with the market extremely overbought in every intraday timeframe, from the 5-minute to the 2-hour, some caution is still warranted.

Opportunity Knocking

A convincing breakout above the wider resistance zone would almost certainly trigger a breakdown in IV, giving us an opportunity to buy on the initial plunge; a convincing reversal back into the S&P’s trading range of the past two months could point to a rebound in IV, at least in the short term, allowing us to extend our maximum entry-level IV threshold and take advantage of short- to intermediate-term volatility expansion. Even as the VIX has been falling, the VIX futures term structure continues to show expectations of higher implied volatility going into September and October.

So the bottom line is, we’re planning to opening an August position this week, and perhaps before the close today. If we don’t make our move this afternoon, I’ll follow Jared’s recent practice of trying to give advance notice of when a trade alert might be coming.

Supplemental Trades Footnote

On a different subject, I’ve decided to start listing Supplemental Trades on the Portfolio page. It’s important for members to understand that they are not part of our official core newsletter portfolio and are not autotraded. Anyone who decided to follow the IBM Aug/Sep double-calendar trade on Thursday should be experienced enough to track its status on their own—but since we’re on the subject, as of this posting the position was mid-priced at about $2.53, for an unrealized gain of about 2%.

We have no other open trade…yet.