Condor Options

Volatility Tracker for the week of November 8, 2009

I wondered last week whether we would see a return to the reflation rally or were entering a new regime dominated by mean reversion. The price action last week counts in favor of both, as we reverted to the closing highs of the prior week; I expect a more definitive answer by November options expiration.

The sale of out of the money equity index puts and/or put spreads I suggested last week worked out nicely, as prices moved higher and most of the equity implied volatility indexes printed five consecutive lower closes. For example, the SPX November 1020/1015 put vertical closed Monday at a $1.55 credit, and could have been closed Friday for a debit of about $0.35, a 34% return on capital risked. Our newsletter subscribers and managed accounts were positioned similarly.

The 30-day historical volatility of oil (USO) made new lows for the year, closing Friday at 27.24. [16] The last time this short-term measure of oil volatility was this low was in May 2008 amidst a strong up-trend. In contrast, recent price action has been relatively trendless; the spike to 1.6 in the implied/realized ratio this week suggests that any option buyers have seen considerably less volatility than they paid for a month ago. I would consider net buying options with crude below the $76 level.