BofA interest rate strategists Ralph Axel and Ruslan Bikbov suggest that now would be a good time to buy tail risk hedges. (hat tip Joe Weisenthal) 6-month options on 10-year swap futures are as inexpensive now, they claim, as they’ve been in decades, excluding one period in 2006. 6M IV on 10Y Swap Futures, bp. Source: BofA Merrill Lynch Global Research So far, so good. If rates are your key concern, this looks like a decent time to…
Thursday, March 15, 2012
Implied volatility (IV) skew is one of the most important and interesting aspects of listed options. IV skew typically refers to the differences in the implied volatilities of options in the same expiration cycle with different strike prices. There have been many attempts in the academic literature to model the behavior of changes in skew, but the interpretation of skew information by traders is still done largely on a qualitative and ad hoc basis. In “Quantifiable Implied Volatility Skew,”…
Friday, February 24, 2012
The jargon of options trading sometimes turns people off, and maybe “volatility skew” is one of the biggest hurdles. So I’m going to explain the concept in a straightforward way, and then explain why volatility skew is something you should care very much about. Volatility skew usually refers to the difference between the implied volatilities of options at different strike prices in the same expiration cycle. For the majority of stocks and indexes, options with high strike prices have low…
Friday, February 17, 2012
We’re entering the following position this morning for March expiration: Day limit orderBuy to open 2 SPY April 139 callsSell to open 2 SPY March 139 callsBuy to open 2 SPY April 134 putsSell to open 2 SPY March 134 putsfor a net debit of $2.85 or better. Note that 2 contracts is our base position for double-calendars. Trading whole-number multiples of the base-position size ensures that adjustments will not result in unbalanced positions. In…
Wednesday, January 25, 2012
We’re reducing our upside risk to adjust for this afternoon’s rally by rolling our position in the Feb/Mar 125 put calendar up to a call calendar at the 135 strike, with the following order: Day limit orderBuy to close 2 SPY Feb 125 putsSell to close 2 SPY Mar 125 putsBuy to open 2 SPY Mar 135 callsSell to open 2 SPY Feb 135 callsfor a net debit of $0.08 or better. Note that the…
Monday, January 23, 2012
Last week SPY-options implied volatility dropped by almost 15%, which, along with the share price climbing above the center of our risk curve, was a drain on both unrealized return and projected profit at expiration. However, following the strategy rules for managing volatility risk with our entry trades is paying off: at Friday’s close, the unrealized return on our February trades was up from the week before. In post-session options-trading, we were showing about a 3.8% unrealized return on total…
Wednesday, December 14, 2011
We’re reducing our risk this afternoon by closing the call side of our December/January double-calendar, as follows : Day limit order Buy to close 2 SPY Dec 131 call Sell to close 2 SPY Jan 131 call for a net credit of $0.36 or better. Note that the 2 contracts specified above represent all of our current position in the Dec/Jan 131 call calendar portion of the 123/131 double-calendar. Analysis: I’m going to start off the analysis…
Monday, December 5, 2011
Traders continue to see and hear no evil except European sovereign debt, as the market shrugs off U.S. economic data that, while not significantly worse than expected aren’t exactly indicative of a major turn-around. SPY rallied off its opening half-hour low, broke above its opening-range high of $126.89, and held an initial retest of that level. Breadth is solidly bullish on hope of a swift, long-term resolution to the euro-crisis. With SPY January implied volatility down nearly three points but…
Monday, December 5, 2011
In what the headlines are trumpeting as the best week for the market in three years (some have claimed it’s “one of the best weeks ever [emphasis mine]”, our current risk profile has suffered more from the plunge in implied volatility than from the move in underlying SPY shares. While that might not sound like a good thing, it means that we’ve been managing delta risk prudently and, considering how far IV has fallen, vega risk as well. IV for…
Thursday, December 1, 2011
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: 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…
Jared Woodard is a registered commodity trading advisor who specializes in trading volatility as an asset class. With over a decade of experience trading options, futures ... Read More
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Saturday, March 17, 2012
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