BY ANDREW GIOVINAZZI 

August 27, 2023 

Yo Pit Crazies,

J-Pow did his bit by keeping the rate thing steady in his Jackson Hole remarks. He’s not raising for now but could change his mind. With bank and US Gov downgrades on his mind, he has to be hearing that. My prediction is that rates don’t go down until the deficit starts to get back to reasonable (less than 1% of GDP, which is still nuts) levels.

But we are about volatility and the market here. The good thing about Option Pit is any student can learn to trade direction, volatility and time. The fact that Fed Chairman Jerome Powell was speaking Friday created a trade with a calendar event. Generally after an event, Implied Vols drop – that means VIX drops.

VIX closed at a 20 day low. Where is it going now?

The Natural Tendency for Implied Volatility is to Follow Realized Volatility

While there are caveats to this rule, it most holds true. Right now, realized volatility in the SPX for the last 10 days is 12% with some big events that just crossed the line. Generally that presses IV down because the liquidity provider is always in a race against time.

On Friday, a student in Weekly Profit Cycles asked me why I thought VIX was going down that day. Here’s what I said:

The LP knows that on balance they buy options, so they are in a constant battle to own them for as little as possible.

How would I know this? I was a liquidity provider for 15 years.

The liquidity provider is racing to press option prices down if they know realized vol is lower.  That makes VIX go lower a little every day, all things being equal.

We added some iPath Barclays Series B S & P 500 VIX Futures ETN (Ticker: VXX) puts in the Trading Desk on Friday. I even day-traded a 5 lot for a 100% gain because I knew the race to crush option premiums started. Nothing is guaranteed so we did hedge the VXX puts with some Mini SPX Index (Ticker: XSP) put flies. Both sides have positive decay.

It’s like magic. Soon I’ll report how the magic bean grew into a GreenStock.

To Your Trading Success,

AG