Large moves in SPX are nothing new. In fact we see them all the time and 2018 in particular had large moves in SPX but in VIX also, especially VIX. Today our Option Pit Pro Chat Room could almost smell the non-selloff in SPX. Mark plopped into the feed on Sunday night that this dip would be bought. And so it was. I struggled to close some long SPY put spreads this morning.
Relative moves in SPX are the key
If one wants to trade volatility the relative SPX moves to the options prices are important. A down .45% move in SPX should yield a small pop in VIX, no more than ½ a point or so. With VIX cash up 2.47, allowing .70 for the weekend, that was an outsized move. Granted the overnight had 50 points lower in ES/, but VIX is usually good at telling a story. The story is a near 1% move in SPX is coming soon again. The vol traders are not pricing the close to close today but swings in the near future. They are expecting much more movement.
Set up for long gamma but not long vega
Larger than 1% SPX MOVES are going to happen in this cycle. The trick is to ride the realized move with as little real theta cost as possible. If you think about it, buying options is about how much the move will pay after the options decay. If you can buy the move without the decay there is much less risk and much better potential reward. I don’t like the long vega trade here and a hard cost to volatility. The net long exposure to volatility is tough since SPX barely broke the 8% 10 day realized vol. If Gamma and Vega are confusing, see our Gold Course. I am not excited to buy an SPX straddle, but I do want to take advantage of a move SPX.
VIX is cheap once again
Upside VIX call spreads are dirt cheap in the May 22 cycle. I know it sounds odd that I don’t want to buy VEGA but VIX CALL SPREADS are cheap, see my Vol Newsletter. If China comes to the table by Friday as promised we should see all-time highs and upside SPX call flies could pay well to 2950 or more. If not, 16 VIX might seem cheap.
Disclosure: SPX, VIX positions
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