Yo, Pit Crazies,

When folks talk about “cheap options,” there are usually two categories they fall into:

• Absolutely Cheap
• Relatively Cheap

The SPDR S&P 500 Stock Trust ETF (Ticker: SPY) is showing relatively cheap options today.  

And the cheaper the options, the higher the gamma, which is the rate of change of the option’s delta, or the derivative’s price movement related to a move in the underlying asset.

Think of it this way, if a rocket is traveling at 15,000 miles per hour and a booster fires off to push it another 2,000 mph, the rate of that boost is gamma.

And that gives me an idea …

Calendar Volatilities Are Very Cheap in SPY

180-day realized vol – the purple line in the chart below – is running at  26%. Holiday reduced IVs are in the teens – and I think they are too cheap.

3-month SPY with realized and implied vols below.

I will wait for the producer price index (PPI) number, but we could see another continuation of the move higher in SPY.

But I  think short term implied vols in the teens underprice any move up or down until the end of next week.

To Your Trading Success,

AG