Unusual Volatility and Three Trade Ideas

In the embedded video, I look at some interesting volatility phenomena in USO options, SPY volatility skew, and VIX and VSTOXX futures.

Here are the trade ideas mentioned:

  1. Short USO implied volatility / long USO realized vol: on the view that USO options are richly priced relative to likely future USO realized vol, you can sell straddles, strangles, or iron condors here and delta hedge with the underlying shares to capture the difference between current IV and future RV. We have a trade on of this type in the newsletter, so I don’t want to go into any more detail.
  2. SPY volatility skew: this is a chart we update and discuss each week for subscribers, and it has been a great tell over the last two months as radically high skew meant short-term condors were a great sale. The skew washout last week has been partially reversed, so I still think SPX and SPY condors for January are attractive.
  3. VIX / VSTOXX futures: you need access to VSTOXX futures or to the VSXX ETN for this. The idea is that when the gap between VIX futures and VSTOXX futures gets particularly wide, a simple statarb move is to sell the high flyer and buy the lower-priced asset – this has meant usually selling VSTOXX and buying VIX. The two have diverged again recently, so this setup is worth a look. Disclosure: we’re looking at this as well for managed account clients.

I record a short video every week for TheStreet.com, and you can find those videos along with other articles I’ve written there at this author archive page.

Random thought: there is a natural tension in writing about complex financial ideas. I find that if I only write for novices or only about very simplistic trades and theses, things can get boring enough that I lose interest. But the simpler the idea, the broader the audience. The opposite approach is to write only about the things that interest me and to be content with a tiny audience of experienced practitioners. The above video and trade ideas are a good example of the latter approach. I could do the latter all day for the five people who would be interested. I guess this tension is present in every field: producing work accessible to a wide audience isn’t the most fulfilling, but working only for other experts doesn’t pay the bills without some dedicated institutional support. I wonder if there is any relevant economics or sociology literature on the role of firms in developing expertise.

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  1. A Dearth of Volatility Opportunities Says:

    [...] example in which implied volatility deviated too far from historical volatility was flagged recently by Jared Woodard in the United States Oil Fund [...]

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Jared Woodard specializes in trading volatility as an asset class. With over a decade of experience trading options and other volatility products ... Read More


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