VolatilityAnalytics.com

  • About the Volatility Analytics Newsletter
  • Contact
  • VIX 101

Will Volatility/VIX Make a Return this Month?

Posted by Scott Murray on November 1, 2013
Posted in: Uncategorized. Tagged: VIX, Volatility.

There has been no volatility to speak of lately, so the posts here have been thin. While my focus therefore has been on specific name volatility arbitrage, (calendar IV spreads) there are hints that volatility may rise in the month ahead. Let’s examine why.

First let’s look at the S&P, NDX, and RUT charts (using SPY, QQQ, and IWM for volume profiling):

spy111 qqq111 iwm111

All three charts are very bearish, with MACDs rolling or crossing on every one. As you can see, MACD does not immediately turn around and head back higher until it resolves itself. It almost always leads to lower prices. Because uptrends do not reverse on a dime generally, (blow-offs aside) you get some chop at the top. That is what we are doing right now. But the canary in the coal mine may be the Russell 2000. It’s already only 2% above the 50 day after giving up 3% this week alone. Unlike the other indexes, it does not respect the 50 MA that much, unlike the S&P 500, which everyone watches like a hawk when it nears the 50.

The VIX during this chop is still dormant. While the media tone has slightly changed from “QE forever” to “QE taper in Jan, maybe”, folks are still not bidding up put options. They have reason to be complacent, November is a great month for stocks historically, #3, and when followed by great Seps and Octs, the chase usually is on to Dec 31st. But you more need buying, and there has been a ton of inflow lately to equity markets. The VIX may be lurking though, for at least an uptick:

vix111When the VIX sits down here, it takes 4-6 weeks generally for it to make an inevitable move higher. At least a move off of the 12-13 level. The good thing about the VIX being so low, is that you don’t have to pay much if you like downside options, anticipating a natural consolidation in stocks. One thing that works pretty well in this scenario are diagonal spreads. Let’s look at one example of how to get your risk/reward in asymmetrical shape.

spyiv111

This is the option ladder via the fantastic LiveVol platform. I like diagonal calendar spreads in this scenario. You would sell a nearer term put at one strike and buy another longer dated put at a lower strike, thereby lowering your cost and giving you the opportunity to make multiples on a market slide. One potential trade would be to sell the SPY $174 Nov 8 put for .40 cents and buy the Nov 15 $173 put for .56, for a net debit of .16. If the SPY stays flat or falls over the next two weeks, this trade will work and could be a big winner.

A rise in volatility will also juice the longer dated put as well. It is very hard to lose significantly on this trade. If the market stays right here next week, without even falling this trade will probably make 50%. If it falls to 174 next Friday, then you are looking at a 5x or more return, as the ATM puts for next week are worth around $1. That is without adding any vega to the put value.

Expect more posts in the coming week with vol trade set-ups.

Posts navigation

← Volatility is Alive, Even if the VIX is Dead for Now
Volatility ETFs Ripe for a Holiday Trade – VXX and UVXY Roll About to Get Heavy →
  • Subscribe to the VA Newsletter – $30/mo

  • Follow us on Twitter

    Follow @VolatilityWiz
  • RSS Volatility Analytics RSS Feed

    • Volatility Analytics Newsletter Samples
  • Recent Posts

    • Volatility Analytics Newsletter Samples
    • Summer Volatility – Will it Vanish?
    • Creative Volatility Trading (Part 1) – Calendar Ratio Spreads
    • Trading Volatility in a Low Vol Market
    • How Much Short-Term Downside is Left in VXX and UVXY?
  • Archives

    • May 2021
    • May 2018
    • May 2017
    • April 2017
    • November 2015
    • August 2014
    • May 2014
    • March 2014
    • November 2013
    • October 2013
    • September 2013
    • August 2013
    • July 2013
    • June 2013
    • May 2013
    • April 2013
    • March 2013
    • February 2013
    • January 2013
    • December 2012
    • November 2012
  • RSS VIX and More Blog

    • The Latest on VXX and Additional Creation Unit Suspensions by Barclays
    • SPX Weekly Options Will Soon Be Available with Expirations Every Day of the Week
    • UVXY Dominates VIX ETPs By Dollar-Weighted Volume
  • Categories

    • Uncategorized
Proudly powered by WordPress Theme: Parament by Automattic.