BY ANDREW GIOVINAZZI
May 17, 2024
Yo Pit Crazies,
The first question about volatility I get is why is it where it is?
Just because a trader thinks the market is going to crash does not make it so.
The SPX is the sum total of all thoughts and fears regarding stocks. The volatility of the SPX, the VIX, is the blood pressure running through the veins of the market.
I know, I was a liquidity provider for most of my adult life and I can tell that option pricing is the ultimate fear and greed trade.
Why?
Because of leverage. The two charts below are on very different trajectories so why is that?
Leverage, that is why. Traders are feeling confident to sell leveraged options.
S&P 500 Trust ETF (Ticker: SPY) on top with 2 year chart and 60/90 day IV on the bottom
It is when traders think money is free that things become dangerous.
How is that going right now?
Leverage in options is about gamma
The Greek Gamma is how much of a change in delta for a 1 point move in the underlying. Really simple it is how fast the value of the option will accelerate. The lower the implied volatility, the faster the option will accelerate. What this does is create a cyclone of value in a moving underlying when the implied volatility (IV) gets too low.
The big issue here is that the market is really only moving in one direction, slow and up, currently. It creates the illusion of options being overpriced for short periods of time and that brings confidence from the institutions that want to sell options. When an unforeseen event occurs, look out below.
Right now we need lower IV for a longer period of time to breed some complacency in the next generation of option sellers. That is just starting to happen.
Check out Weekly Profit Cycles with me and learn how to trade it.
To Your Trading Success,
-AG
Andrew Giovinazzi
30-Year Trading Pro
See what's hot at option pit
CAPITOL GAINS: SMR Aug16 7 call closed for a 150% gain
DELTA STRIKE: VLY Mar15 8 puts closed for a 88% gain
PFE May17 26 calls closed for a 66% win
OP MENTORING: SPY Mar22/19 510 put calendars and 520 calls for 6.4% gain
OPTION SHOPPER: ERX Mar28 65 calls closed for a 90% gain