BY ANDREW GIOVINAZZI
January 14, 2024
Yo Pit Crazies,
I don’t know what other Chat Rooms are like but I like our Pro Chat room because we have traders who make a living trading contributing to the room with trades and observations. I put all of the ideas I came up with in the Pro Chat Room. If I miss something, someone else will catch it.
One of my students pointed out that massive call buying was coming into VIX Friday afternoon. How could I tell that it was buying? Because the implied volatility was rising on the down volatility day. That call buyer single handedly pushed up volatility. That also means that the buyer was taking liquidity from the market. There were no ready sellers at that lower price.
That brings me to my Golden Rule of Volatility. It has held up for 30+ years and I still use it everyday.
Time to tell you what it is.
Volatility is driven by two big factors
Volume in the options and volatility of the underlying are the Twin Towers just like the Lord of the Rings. Except they are not bastions of evil and chaos like in the book, they bring order and clarity. My Rule goes like this:
The active strike drives the month
The active month drives the class
The realized volatilities drive the near term implied volatilities
Which drives
The active strike drives the month
The active month drives the class
The realized volatilities drive the near term implied volatilities
Which drives
The active strike drives the month
The active month drives the class
The realized volatilities drive the near term implied volatilities
And on and on and on. This volatility epiphany happened early in my career and once I understood volatility is cyclical it became tradeable. Also, readers might wonder what a “class” is? It is a group of options related to an underlying like Apple Inc (Ticker: AAPL) or SPX. In the old days an announcement would go out like, “Trading in all option classes starting with A are halted due to technical problems….” Driving the month means moving the volatility higher or lower, that affects all options related to the name. The entire class of options, all strikes all months to some degree.
So when the trader bought VIX calls Friday, that affected all options in the class related to VIX to some degree. Also, VIX and SPX are related since VIX is the implied volatility of SPX. I consider them the same class of options. I base my entire Weekly Profits Cycle product around this rule.
As traders we do not know exactly what is going on behind the VIX call buy. The trader buying them can be loading up on SPX futures and creating a position poised for a launch higher with a VIX hedge. It could be front running the rate decision on Jan31. We will know by Feb14 and my Weekly Profit Cycles positions should be paying me by then.
Stay tuned!
To Your Trading Success,
AG
Andrew Giovinazzi
30-Year Trading Pro
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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