Yo, Pit Crazies,

Below is a great example of SPX not going anywhere for an entire week. Understanding how implied volatility (IV) works is a great aid in trading options. I do that in OP Mentoring week in and week out.

First glance would be that SPX was flat and VIX dropped as a result.

5 Day SPX with 1 min candles and Apr, May and Jun Sigma vols

That is only part of the story.

Calculate The Weekend Effect

Theta is the cost of 1 day of decay to an option, and vega is the change in value of an option for a 1 point move in IV.  

A 3 day weekend would cost 3 days of theta or roughly $4.65 in the value of the option.

Vega can move the value of an option independent from Theta, or they can move together.  

Looking at the Theta/Vega a 3 day decay will take the option down in value roughly 1.5x the vega. So if the liquidity provider wants to start discounting the option, they move the date forward 3 days.

That will read in the case of this SPX Apr21 4110 option as a 1.5 point drop in IV, since that is roughly the value of Vega or the change in the option value for a 1 point move in volatility. 

Today’s drop in IV was more than 1.5 points but not too much. Trades took the whole weekend out right up into the close.

They were waiting for a shoe to drop that did not happen. Once again, they’re not in a rush to bid the vol into the CPI/FOMC meeting. 

Like I said yesterday, the market is starting to get used to this inflation thing.

 

The Rundown

Nitro Trader

Another nice win in Nitro Trader this week in Nordstrom Inc (Ticker: JWN) Apr21/Mar17 15 put calendars closed for a 74% gain 

Power Income Trader

Another incredible week for Griff!

SPX, SPDR S&P 500 Trust ETF (Ticker: SPY) -1,5 Apr05/Apr06 4070/4075 put spread, 408/407.5 put spread closed for a 51% gain

SPX -1 Apr05 4170/4175 call vertical spread closed for a 100% return on credit

To Your Trading Success,

AG