Volatility Tracker for January 19, 2010
Last week, I noted the very wide spread between short-term realized and implied volatilities. Although the selloff on Friday alleviated conditions slightly, [5] the spread is still large enough that traders inclined to be net sellers of options need not fear occasional daily increases in realized volatility. [6] The smartest trade in equity index options at this point might be to sell the wings and buy the guts on a dollar-neutral basis, delta-hedging as needed:…
David P. Simon, “Examination of long-term bond iShare option selling strategies,” Journal of Futures Markets advance online (2009).
This article examines volatility trades in Lehman Brothers 20+ Year US Treasury Index iShare (TLT) options from July 2003 through May 2007. Unconditionally selling front contract strangles and straddles and holding for one month is highly profitable after transactions costs. Short-term option selling strategies are enhanced when implied volatility is high relative to time series volatility forecasts. Risk management strategies such as stop loss…
As pictured below, equity indexes have been highly range-bound since the end of April. That trading range has been between about 470 and 510 in the Russell 2000, and 865 and 930 in the S&P 500.
I doubt that this range is likely to persist for much longer. Fans of technical analysis will note that SPX and RUT are caught in the narrow space between their respective 50- and 200-day moving averages: a break above or below either average will be…
So, option activity in Procter & Gamble (PG) has been extremely high for days now, first ahead of earnings, and now in advance of their merger with Folgers. The stock is 16% off its recent lows, and has been unusually volatile over the past two months along with the rest of the universe.
The interesting thing here, though, is that with all this unusually high option activity, you might expect implied volatility to be hitting new highs as well. But as…
To the right is a fun little trade called the Straddle Strangle Swap. Look familiar? It looks a lot like a simple calendar spread or a butterfly spread. In actuality it is both, making it what I consider a sort of super calendar spread. Now lets take a look at how to construct these and what qualities make them so super.
Straddle Strangle Swaps are a specific type of Double Diagonal. They involve selling a front month straddle and buying a…
Tuesday, January 19, 2010
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