BY ANDREW GIOVINAZZI 

August 20, 2023 

Yo Pit Crazies,

I took my boys to college – first time in 20 years I have no boys in the house. I knew it was going to happen and I’m happy where they are going, but still it’s a bit too quiet.

It feels like that in the market right now – except it’s way too quiet and I don’t know what will happen.

Thursday night I finished my OP Newsletter with this:

In the Trading Desk, we bought SPDR S&P 500 Trust (Ticker: SPY) strangles and iPath Series B S&P 500 VIX Futures ETN (Ticker: VXX) puts. Long market movement but flat volatility. More on this tomorrow.

This type of trade is a feeling, but it has notable wants and needs from the market I am looking at. Remember, trading options is an exercise in making the option fit your opinion and finding an edge. If I buy a strangle in SPY and buy VXX puts, I want a certain… thing.

Is the market giving us that thing?

At the Money Volatility is Not Increasing

That’s a bit of a misnomer. The current at the money IV has not increased since SPX was 4600. As SPX drops, ATM IV increases automatically.

Remember, the skew in options is ready for a drop in SPX as it corrects for assumptions in the BlackScholes model. Note that since the market dropped from 4600 to 4375, IV of the 4375 strike has not changed and actually dropped.

That’s right – as VIX has gone up, IV has dropped on the strike that is currently ATM.

Chart of SPX Sep15 4375 strike put IV from peak to trough in SPX

Stocks are sliding and IV isn’t going up. That’s why we wanted the SPY strangle and the VXX put. The strangle trades the slide, we sold our SPY put Thursday, and the VXX put is ready for when IV drops.

For now, I view this as a correction from a recent top after months of one way up. Until IV really expands, that’s how I see it. My VXX should pay, too.

To Your Trading Success,

AG