Memory is a funky thing in the market.? Right now many new investors and traders have the 2008 crash in the forefront of their minds.? I don?t blame them.? What we have had since then is mostly a declining volatility environment that has reared its ugly head on the big macro issues that faced us, namely the Euro and the US deficit.? Remember it was the 1-2 punch that set things backward in the summer of 2011 since it looked like a total failure by leaders to get a handle on the problems of the day.? Right now the trajectory appears to be better.? How do we know?? Every advance in fiscal prudence, even higher taxes, has been met with market rallies.? Bernanke was QE?ing back in the Fall of 2012 and the market did not really take off until the Fiscal Cliff brought some answers.? The more positive news we get on government spending (as in going down) the more we rally.? Just look at the tape and there is the answer.
What does this have to do with options?? It has consistently caused us to melt to the upside.? Every snippet and shard of steady news helped launch equity markets out of the morass of 2008.? Those moves, since they are on thin volume, give us deep rallies of 1% or more which makes selling upside calls a very tough game.
Today the VIX was up but the VIX futures were in.? Mark wrote about VIX near term futures looking expensive yesterday and they are cheaper today.
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If you look at the per strike change in volatility today the early gains in IV slowly dissipated by the end of the day.? Note the color changes from dark green (10% IV move) to the lighter green in the very sensitive just OTM puts in the SPY.? The IV could not hold up. ?The volatility can rally if the market rallies big but the key really is if the IV rally continues.
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Now later in the day.. the pace of the vol rise decreases.
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1% moves won?t happen every day but the market is ?swinging? in the up direction.? I think overall the IV will still be a little weak near term after the rally today. I don?t think we will see 1999 again (remember 100% returns in the NASDAQ) but markets can rally for longer than you think especially if you cannot remember what money coming back into the market looks like.
The Trade:
Owning upside index butterflies with a nice distance between the wings will work to keep the theta low, or positive, and buy some disaster puts 60 days out ?in combination. ?This strategy works well in a market that will keep on flying.
If you want to learn what all this means- This is the type of information we will train you to analyze in our?gold course. ?If you needed help following this trade, you should be in that course. ?Call us at 888 Trade 01