Yo Pit Crazies,

Vol Man doesn’t like what he sees for implied vols in the short term for the SPX. There’s one thing to have events on the horizon like the Debt Ceiling, Fed Minutes, and Nvidia Earnings and assume VIX will be lower afterward.

The problem is in the meantime and the run to 4200 last week on the hope things turn out okay:

Vol Man riding SPX Jun16 Sigma IV on the close May23, 2023

The hopium bowl is getting empty this morning. Mark and I were following this in the Trading Desk and thought short term options were a little inexpensive.

Turns out we were correct. The market was pricing news like nothing but good stuff could happen.

What is going on?

IV Is Getting Out of the 30 Day Doldrums

The SPX just finished a near historic run of weekly closes less than 1% of the prior week’s close. That’s what’s known as  a volatility killer. If the market doesn’t go anywhere, it’s hard for the liquidity provider to jack up prices because time decay is fierce.

Note the change in Sigma in the SPX chart. Sigma is the average price for option volatility in a fixed term like the Jun16 expiry. 

Market makers pumped the vol up to a  10 day high. Granted, the selloff was only 1%, but it‘s been awhile. The reality of potential market moving events I outlined above is actually moving the market. Who knew!

Vol Man notes anytime IV is higher with SPX at the same level. Traders are pricing in more realized vol, market moving, in the short term. We should be prepared for it.

In the Trading Desk we looked at buying VIX, iShares S&P 500 VIX Short Term Futures (Ticker: VXX) strangles, or SPDR S&P 500 Trust (Ticker: SPY) strangles with VXX puts.  Those ideas will still play as IV expands into the resolution of the Debt Ceiling issue.

To Your Trading Success,

AG