The Option Pit VIX Traffic Light Is Yellow: Volatility is likely to move wildly.

The SPX had a strong day ahead of CPI, rallying over 50 points. As expected, the VIX rallied on Wednesday as well, closing at 21.09.

Do not forget how I game-planned out the result, and given the move we had on Wednesday,  I think my thesis is even stronger.

Now that I touched on that, let’s talk about what follows CPI on Friday morning…

The start of earnings season.

Some traders really love playing earning because they see it as a chance to play volatility.

In truth,  it is most traders’ chance to play a coin flip game, except this coin flip charges you .52 to win a 1.00.

Take a look at the moves BAC, which reports on Friday morning had made over the 8 quarters…

The blue line is the average implied move,  the yellow is the actual move.

However, it’s not that simple, just sell vol you say…

Here is the problem:this is the END of day…

Look at how the moves play out…most of the time the move is smaller than expected…

But when it is larger than expected, the move is MUCH bigger.

And that forgets that initially on the open,  the earnings move tends to be much bigger before the stock reverts a bit.

In truth there is almost no edge in selling or buying premium ahead of earnings…

So what do you do?

Trade to it…not through it….

Here is a chart of BAC and IV.

I want you to notice that BAC has rallied almost 4 points since December expiration…

In that time IV has remained flat…

This means despite the rally,  IV has been firm.

You could have anticipated BAC having a pre earnings move…something that often happens…and bought calls or even a straddle and felt no ill effects from IV falling.

With that in mind, let’s look at AAPL:

IV has fallen off as the stock has rallied a touch…

If you want to play a continued move higher, you can essentially rent calls for free…want to  own puts…

Same thing…

Play earnings smart…don’t actually play the event.

Your Only Option,

Mark Sebastian