An Interesting Take on Selling Implied Volatility Here

Steve Place over at InvestingWithOptions has a very interesting take on implied volatility and these current levels. In fact, he believes that it is possible to indeed sell implied volatility right here and gives two potential trade ideas. Below is an excerpt from the post:

“The VIX is a BUY” the headline screams. And if you look only at the VIX, it appears so. But we know better. Looking at the VIX in a vacuum is a poor idea. When we say “volatility is a buy,” we must ask– relative to what?

Go on over and read the rest of the post: It’s Possible to Sell Volatility Here.

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Video: 5 min Update on Implied Volatility and Skew of S&P 500 and Russell 2000 Options (1/13/13)

Here’s an update on the state of implied volatility and implied volatility skew of S&P 500 and Russell 2000 options. It’s very important to know where you are in IV terms when trading these two indexes.

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Transcript below:

Hey this is Victor Mora of vicmora.com and today is Sunday, January 13th,
2013. For better quality, please watch this video in HD.

Let’s get a quick update on implied volatility and implied volatility skew of
S&P 500 and Russell 2000 options.

The S&P 500 closed slightly higher for the week but it still in a resistance
zone. I’m leaning more towards a pullback or at least further consolidation.
However, on a convincing break above 1475, my stance will change.

The overall implied volatility of S&P 500 options, seen here in red, declined
a little more this week. Down here we can take a look at the implied
volatility percentile rank over the last 30 days. As you can see, implied
volatility is still in the gutter relative to the last 30 days.

I use this spreadsheet to track implied volatility skew. We can see here that
the 10 delta front month put options normally trade at about 142% of the at
the money, in IV terms. At Friday’s close, February 10 delta put options are
trading near 134% or slightly above 1 standard deviation below the mean. March
put options are trading near 134% as well. February and March 10 delta calls
are actually trading below the mean now. So, we still have a flat put skew and
now a flat call skew. However, put skew steepened relative to last week while
call skew flattened, seen here.

Let’s take a look at the Russell 2000. The RUT, once again, made new highs
this week. IV also dropped and the IV 30-day percentile rank is also in the
lows. February & March 10 delta puts are trading closer to the mean. The 10
delta calls are now both below the mean. So, we still have flat put skew and
now flat call skew. However, put skew steepened relative to last week while
call skew flattened, seen here.

Essentially,

1. The S&P 500 and Russell 2000 had big runs so I’d still expect a pullback or
at least some further consolidation. I’ll change my thesis on a convincing
break higher.
2. Implied volatility is at depressed levels.
3. S&P 500 & Russell 2000 options have flat put skew curves in February and
March, but put skew steepened while call skew flattened.
4. Delta neutral or bearish trades still make the most sense here but negative
vega trades still do not. I’d continue considering calendar spreads or
diagonal spreads in this environment.

Current VIX Term Structure and What it Means

Mark Sebastian over at OptionPit has an excellent post about the current state of the VIX, its term structure, and what it is telling us. Below is a highlight of the post:

As I listen to traders belly ache about the ‘low VIX’  I ask them,  why should the VIX be high?  They will usually point to a bunch of reasons, none of which are in the near term.  Right now the VIX is trading near 13.5, and for good reason.  Despite last weeks moves, realized volatility is in the toilet.  With the market moving no where, traders are selling SPX premium in the near term.  Does this mean the market isn’t cognizant of the coming risk?  No, not at all, the market is already pricing in a lot of risk after Feb expiration.

Read the rest of the post: VIX Term Structure is Tipping the  Markets Hand.

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Priceline.com (PCLN) Bear Call Spread Example – Trade Closed

See the previous three posts here: PCLN Bear Call Spread Example, PCLN Bear Call Spread Example Adjustment, and PCLN Bear Call Spread Example – Call Side Closed.

So, the the short put side of this trade closed today. Below is the breakdown of the P/L:

P/L:  -$1.45 + ($0.85 – $0.17) = -$0.77 per spread
Return on Risk (ROR): -$0.77/($5-$0.85) = -18.55%

Below is an updated price chart:

PCLN bear call spread price chart

Originally, the trade was short bias because of the break in support outlined above. However, this turned out to be a bear trap as PCLN skyrocketed higher. I made some adjustments to the trade in order to minimize the loss. We cannot predict the future, we can only manage risk.

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Video: 5 min Update on Implied Volatility and Skew of S&P 500 and Russell 2000 Options (1/6/13)

Here’s an update on the state of implied volatility and implied volatility skew of S&P 500 and Russell 2000 options. It’s very important to know where you are in IV terms when trading these two indexes.

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//

Transcript below:

Hey this is Victor Mora of vicmora.com and today is Sunday, January 6th, 2013. For better quality, please watch this video in HD.

Let’s get a quick update on implied volatility and implied volatility skew of S&P 500 and Russell 2000 options.

The S&P 500 broke this downtrend and closed right at resistance. I’d expect it to pullback or at least consolidate a bit.

The implied volatility of S&P 500 options, seen here in red, completely collapsed after positive fiscal cliff news was released. It’s actually near the lowest levels seen last year.

Down here we can take a look at the implied volatility percentile rank over the last 30 days. As expected, it is at the 0 percentile so it’s extremely low.

I use this spreadsheet to track implied volatility skew. We can see here that the 10 delta front month put options normally trade at about 142% of the at the money, in IV terms. At today’s close, February 10 delta put options are trading near 128% or slightly below 1 standard deviations below the mean. March put options are trading near 129% or slightly below 1 standard deviation below the mean. February and March 10 delta calls are trading slightly above the mean. Essentially, we are seeing a flat skew curve.

Let’s take a look at the Russell 2000. The RUT made new all time highs this week. The IV also collapsed and IV percentile over the last 30 days is also at lows. February 10 delta puts are trading about 1 standard deviation below the mean while the February & March 10 delta puts are trading slightly below the mean. The 10 delta calls are trading around the mean. The skew picture is still flat here but a little closer to normal.

So, here’s a quick recap:
1. The S&P 500 and Russell 2000 had monster runs so I’d expect a pullback or at least some consolidation.
2. Implied volatility is a depressed levels.
3. S&P 500 & Russell 2000 options have flat put skew curves in February and March while the call skew is almost in line with the mean.
4. Delta neutral or bearish trades make sense here but negative vega trades do not. So, I think calendar spreads would make the most sense here.

Priceline.com (PCLN) Bear Call Spread Example – Call Side Closed

See the previous two posts here: PCLN Bear Call Spread Example & PCLN Bear Call Spread Example Adjustment.

The stop area planned for the call side of the Priceline (PCLN) was hit today and I decided not to roll it up or add another credit spread. If the stock starts trading below today’s lows, then I will add a bear call spread again.

P/L: $0.70 – $1.40 = -$0.70 per spread

Total Closed P/L: = -$0.75 + (-$0.70) = -$1.45 per spread

So, here is what is left on this trade:

Trade: Short Priceline.com (PCLN) Jan 13 595/600 vertical spread at $0.85 per spread
Target on Bull Put Spread: buy back at ($0.85 * 0.2) = $0.17 per spread
New Return on Risk (ROR): [($0.85 * 0.8) – $1.45)/($5 – $0.85) = -18.55%
Stop on Bull Put Spread: $0.85 * 1.8 = $1.53 per spread

Below is an updated price chart:

PCLN Bear Call Spread Price Chart

Feel free to leave a comment below, send me a tweet. or an email with any questions you may have.

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Priceline.com (PCLN) Bear Call Spread Example – Adjustment

I entered a bearish credit spread , or bear call spread, on Priceline (PCLN) last week and have made an adjustment to the trade today. See the original post here.

With PCLN trading in a new range, I decided to roll the position into an iron condor. The stop on the bear call spread triggered so the trade closed at $1.55.

P/L: ($0.80 – $1.55) = -$0.75 per spread

Now, the new trade:

Trade: Short Priceline.com (PCLN) Jan 13 595/600/670/675 Iron Condor at $1.55 per spread
Target on Bear Call Spread: buy back at ($0.70 * 0.2) = $0.14 per spread
Target on Bull Put Spread: buy back at ($0.85 * 0.2) = $0.17 per spread
New Return on Risk (ROR): [($1.55 – $0.30) – $0.75]/($5 – $1.55) = 14.5%
Stop on Bear Call Spread: $0.70 *1.8 = $1.26 per spread
Stop on Bull Put Spread: $0.85 * 1.8 = $1.53 per spread

Take a look at the price chart below:

PCLN Bear Call Spread Example Adjustment

I annotated the adjustment points on the price chart above and risk profile below. With implied volatility (IV) dropping, price rejecting right under $640, and a flat 200-day moving average at $650 I believe this trade should work as a decent repair.

PCLN Bear Call Spread Example Adjustment Risk Profile

Feel free to leave a comment below, send me a tweet. or an email with any questions you may have. In any case, I plan to let this ride for a 14.5% ROR.

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Video: 5 min Update on Implied Volatility and Skew of S&P 500 and Russell 2000 Options (12/29/12)

Here’s a quick update on the state of implied volatility and implied volatility skew of S&P 500 and Russell 2000 options. It’s very important to know where you are in IV terms when trading these two indexes.

Follow @victormora
//

Transcript below:

Hey this is victor mora of vicmora.com and today is Saturday, December 29th, 2012. For better quality, please watch this video in HD.

Let’s get a quick update on implied volatility and implied volatility skew of S&P 500 and Russell 2000 options.

As seen in the price action, the S&P 500 has been neutral to bearish the last quarter.

The implied volatility of S&P 500 options, seen here in red, has been spiking the last few days enough to notice the large spread between historical volatility and implied volatility.

Down here we can take a look at the implied volatility rank over the last 30 days. We can see that IV is near the 96th percentile relative to the last 30 days. In others words, really high.

I use this spreadsheet to track implied volatility skew. We can see here that the 10 delta front month put options trade at about 142% of the at the money, in IV terms. At today’s close, January 10 delta put options are trading near 121% or almost 2 standard deviations below the mean. February put options are trading near 131% or about 1 standard deviation below the mean. January and February 10 delta calls are trading slightly above the mean. Essentially, we are seeing a flat skew curve.

Let’s take a look at the Russell 2000 index now. Same sort of price action but a little more neutral. The IV and HV picture is very similar with the large spread here. The IV percentile over the last 30 days is also near 96. January 10 delta puts are trading about 1 standard deviation below the mean while the February 10 delta puts are trading slightly below the mean. The January 10 delta calls are trading near the mean while February is trading slightly below the mean. The skew picture is still flat here but a little closer to the norm

So, here’s a quick recap:
1. The S&P 500 and Russell 2000 are showing neutral to bearish price action.
2. Implied volatility of both is high relative to the last 30 days.
3. S&P 500 & Russell 2000 options are seeing a flat put skew in January and February while the call skew is almost in line with the mean.
4. It would make sense to structure neutral to bearish trades that capitalize on a drop in implied volatility. Taking the flat skew curves into consideration, one would want to buy the relatively cheap out-of-the-money IV and sell the rich at-the-money. So, I think butterflies and directional flies will do best in this environment.

Trading The Yen Using Options

Steve Place over at Investing With Options has a great post on the USD/JPY pair and how you can trade it. Using technical analysis and implied volatility analysis, he points out a trend change in the pair and structures an optimal trade. Below are two things he addresses in his post:

While many other markets have been chopped up in ranges, a significant trend change is underway in the Japanese Yen.

Even though volatility has continued to decline in the stock, the implied volatility has stayed fairly elevated. Why is this?

His claims are addressed, question answered, and trade structured in his post located here: A Look into the Yen and How You Can Trade It

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Priceline.com (PCLN) Bear Call Spread Example

I entered a bearish credit spread , or bear call spread, on Priceline (PCLN) today for a couple of reasons. See the trade below:

Trade: Short Priceline.com (PCLN) Jan 13 650/655 Call Spread at $0.80 per spread
Target: buy back at ($0.80 * 0.2) = $0.15 per spread, rounded down
Return on Risk (ROR): ($0.80 – $0.15)/($5 – $0.80) = 15.5%
Stop: $0.80 + ($0.80 – $0.15) = $1.45

PCLN has been a weak stock as of late and broke support today. Also, the implied volatility (IV) is high relative to the last 30 days. Being short IV is best when one thinks IV is relatively high. You can see this my taking a look at the screenshot of the daily chart of PCLN below:

PCLN Daily Chart

Take a look at the risk profile below, the white line is the current theoretical profit and loss of the trade while the red line is at expiration. The primary profit driver of this credit spread is of course the negative delta that increases profits as the stock heads lower (movement to the left on the white profit/loss curve). Then, the negative vega would increase profit as IV decreases (upward shifts on the profit/loss curve). Finally, the theta should take care of the rest of the profits (also upward shifts on the profit/loss curve as time goes on).

PCLN Bear Call Credit Spread

I plan on adjusting if PCLN moves above the $635 level. Otherwise, I’ll let this one ride for a target return on risk of 15.5% within a few weeks. Stay tuned for updates on this trade.

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