Change your trading forever

Andrew Giovinazzi

BY ANDREW GIOVINAZZI

November 3, 2024

Yo Pit Crazies,

One thing I tell my students is that if you want to trade options you have to understand how they move and why they move. In order to be successful a trader must:

Be right on direction

Be right on time

Be right on speed of move

It is like making a left turn in the middle of the road. Time, direction and speed are all important. Mess one up and the car is going to the junkyard like the trade. Hit them right, and there are no problems.

I am positive the USA has had more contentious elections than this. There was no VIX in the 1800s but we survived. Checks and balances worked well the last 200 years but it is clear when the Executive Branch is trying to overstep them and push them aside. That does contribute to market volatility since the delicate power balance is upended. Also remember the system has worked well, better than any I can see, no matter what the noise in Social Media says.

1 year chart of SPX with implied and realized volatility

What we need is a way to evaluate, direction, timing and speed of movement.

Separation in Volatility is key

The only other time this year implied volatility (IV) was this high was around the Aug 5th Carry Bomb event. That is the red line highlighted. Notice how the IV, which is just expected movement, normally follows the blue line, historic volatility (HV). HV is how fast the market actually moves.

1 year chart of SPX with implied and realized volatility annotated

We are at an unsustainable level due to the election rhetoric. I have no doubt, if there was a VIX in 1864 it would be in the mid 30s over the election. I expect a return back to norms when IV and HV start moving together. One way or another the election will be over and it is more than likely the vote count will be enough to declare a winner. The Grand Old Republic will grind on.

How to address that and trade it? Trade the two lines moving back together and it should be like making a simple left hand turn at the right time.

To Your Trading Success,