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…
Monday, March 23, 2009
Long-term Equity Anticipation Securities (LEAPS) are a class of options with expiration dates longer than a year. Their purpose is to allow investors who would otherwise hold shares of an underlying equity to buy an option instead, and thereby participate in expected price movement without tying up as much capital. However, we caution investors against using LEAPS as stock substitutes without first taking volatility considerations into account. Let’s say you want to buy 1000 shares of Cisco Systems (CSCO). At $15.91,…
Tuesday, November 11, 2008
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We often refer to the complementary nature of iron condors and calendar spreads, in that the former benefit from falling implied volatility, while the latter generally get a boost from rising IV. So does that mean you should balance out volatility risk by allocating as much capital to calendars each month as you do to iron condors? Unfortunately, it isn’t that simple. First, it’s important to think about where implied volatility might be headed, especially when it’s at one extreme or…
Wednesday, October 22, 2008
Following up on our recent post about VIX futures, a reader asked: If you want to get short volatility, why not just sell some of those VIX futures here, or maybe a vertical spread of VIX options? Why mess around with equity indexes at all? Good question. The difference depends on what you mean by “volatility.” VIX futures are a pure vega play, which is to say that they give you exposure to changes in implied volatility, but that’s it. A short…
Tuesday, August 12, 2008
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There are plenty of ways to put on option trades that have a neutral outlook: straddles, strangles, condors, etc. Whereas stock and futures traders are limited to whatever price action the market gives you, options let you take a view on implied volatility (vega), the passage of time (theta), and the rate of change of the rate of change of the option per unit move in the underlying (gamma). Okay, that last one isn’t so obvious, but the idea is…
Friday, May 29, 2009
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