Tag Archive | "spy"

The Problem with Volatility Skew, and Why You Should Care

Friday, February 24, 2012

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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…

The European Volatility Risk Premium Persists

Tuesday, January 10, 2012

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The media narrative at the moment is that U.S. investors are happy to ignore all things European for as long as modestly positive domestic economic news keeps trickling out. The headlines today about stocks being up “on” news from Alcoa were silly enough,* but this does seem to be a real theme – slight reductions in the odds of a 2012 recession mean it’s time to pile into stocks, apparently. The smarter parts of the market qua options and volatility traders have…

Unusual Volatility and Three Trade Ideas

Thursday, December 1, 2011

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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…

Trading the End of the Risk On / Risk Off Environment

Tuesday, November 8, 2011

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What if the “risk on / risk off” market environment comes to an end, even for a little while? This article explores a trade designed to profit from that possibility. The CBOE Implied Correlation Index got a lot of attention around the blogosphere and on Twitter last week, following Tuesday’s intraday spike to 103 and closing value above 80. Regular readers of my posts here are already familiar with the index, so I won’t delve into a thorough explanation except to…

Trading Apple’s Relative Performance with AVSPY

Wednesday, October 5, 2011

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AAPL really took it on the chin on Tuesday, as traders were apparently of the view that the most important feature of the next iPhone would be its name. I wrote up a trade using the NASDAQ OMX Alpha AAPL vs. SPY Index (AVSPY) options for TheStreet’s Options Profits service, and the article got picked up for the free site and is featured on their main options page. These new Alpha Index products aren’t super-active, but a 3000-lot trade…

Buy Puts?

Thursday, August 4, 2011

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Some miscellaneous thoughts as equities notch another decline of 2.5%. 1. If your portfolio is too bullish or unhedged, by all means there’s no reason to stay “naked long,” but at the same time this is the worst sort of environment in which to be buying puts outright, because the high IV and steeper skew means put buyers will have seriously overpaid if we get even a modest bounce over the next week or two. 2. If you want…

Volatility Skew Hitting Recent Highs

Monday, March 7, 2011

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I was quoted in a recent Reuters article about how the market correction has been perceived by options markets: In the SPDR S&P 500 fund, the bearish sentiment is reflected by a high skew, a premium given to out-of-the-money puts relative to out-of-the-money calls, according to the latest weekly data. “The recent volatility skew for SPY options expiring in April and May has reached levels not seen since last fall.” said Jared Woodard, principal at research/…

Bonus Trade: SPY November Butterfly

Monday, November 8, 2010

2 Comments

Our paid newsletter strategies are predicated on the expectation of mean-reversion (with risk-management rules for containing losses in trending markets)—in implied volatility as well as in price of the underlying. But when we find ourselves in a strong bullish trend, it's often desirable to both increase delta and decrease vega. One great way to do this is with butterflies...

VIX Portfolio Hedging in a Crisis-Free World

Tuesday, October 12, 2010

6 Comments

This is the third post in the series I’m writing to introduce the VIX Portfolio Hedging (VXH) Strategy. The most important feature of the VXH strategy is that it offers protection against severe market declines. Almost equally important, however, is its performance during normal market environments. A hedging strategy that profits during a market crash is no help at all if it imposes heavy costs the rest of the time; this is one of the chief limitations of conventional…

Why Conventional Hedging Methods Fail

Monday, September 27, 2010

10 Comments

This is the second post in the series I’m writing to introduce the VIX Portfolio Hedging (VXH) Strategy. I am discussing the problems with conventional portfolio hedging methods first – before getting into the details of the VXH strategy – because if widely-known conventional methods are suitable, then there’s little reason why anyone should consider a novel method. The two conventional hedging methods I’ll review are diversification (Modern Portfolio Theory), and portfolio insurance using long put options and option…

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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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