Yo Pit Crazies,
Vol trading is just like any other trading … except it’s not.
That’s because option volatility reverts or drops to a lower level after periods of higher levels.
Securities have a volatile personality, and they tend to live in the normal. Just like a person can get angry then calm down.
My issue has always been duration: how long will the volatility stay up?
Thankfully, there are many clues; when the vol stops going up, it is usually going down shortly there after.
The SPDR KBW Regional Banking ETF (Ticker: KRE) is a textbook example of a normal vol pattern and the recent spike on the right from the Silicon Valley Bank (Ticker: SIVB) debacle.
The volatility was one way – a personality – and now it’s not.
KRE 1 year chart up top with implied vols on the bottom chart for 30, 60, 90 day IVs.
That created an interesting trade dilemma for me.
Out of the Money Calls Are Very Volatility Sensitive
When researching a long delta trade, get long. For KRE, my eye gravitated to the KRE Apr21 2023 50 calls for a quick snap back. However, with KRE up $1 on the day, the calls were down .15. Not a very good performance for a long call, so I looked for plan B.
Sometimes, the volatility in an option can overpower the direction of the underlying when it comes to performance. If I buy a call and the volatility goes down too much, it will kill the performance due to the underlying move. That was the case yesterday.
As one can see from the above chart, there is plenty of time to “sell volatility” in KRE. It’s far above any historical average, and I still think KRE goes ripping past $50 in the next month.
The dilemma is buying a call or selling puts in a hinky market.
I am ok with a 1 x 2 put spread KRE – buying 1 put and selling 2 for a nice credit – but that might not be for most people, unless they want to deal with the potential of the stock below $37. That is a vol selling trade.
It also could help pay for the call premium when I get the inevitable drop in IV. I want to wait for the IV to drop a bit more before I buy a call.
The bigger surprise is the strength in the Invesco QQQ Trust (Ticker: QQQ) as a flight to quality. I ended up with a pair of dueling butterflies in Nitro Trader but skewed to the upside when QQQ sees $300 again. That should happen before or just after the FOMC meeting on Wednesday.
The Rundown
Power Income Trader
iShares Barclays 1-3 year bill ETF (Ticker: SHY) Apr21 81 calls closed for a 136% gain
Riot Blockchain Inc (Ticker: RIOT) Apr28/Mar31 8 call calendar closed for a 48% gain
Win The Week
Market Vectors Junior Gold Miners ETF GDXJ May19 36/38 call spread closed for a 76% gain
The Trading Desk
-1X Inverse VIX ETF (Ticker: SVIX), VIX Mar17/Mar22 17 calls, 26 calls closed for a 74% gain
To Your Trading Success,
AG