Yo, Pit Crazies,

I was having a conversation with Licia Leslie, our resident Queen of the Candlesticks (and if you don’t believe that title, look at her incredible results the past year), to discuss the crazy bid for name volatility at the end of the day.

As you can see from the snap below, VIX did not go nuts, and even closed lower than the highs of the day:

So what was the flow doing?

At Option Pit, the key to many of our option buying programs is finding relatively cheap options.

And it took her a while to “shop” yesterday, as it were.

It reminded me of a story from the past and it pertains to Tuesday’s closing action.

Liquidity Providers Gassed the Volatility in Name Stocks

Let me take you back to the later-90s.

I was a younger-than-I-am-now floor trader on the Pacific Coast Stock Exchange …

Russia had defaulted on debt and many hedge funds were blowing sky high including Long Term Capital Management (LTCM), which was trading very short term arbitrage operations.

As I recall, the at-the-money SPX IV was in the low 40s. Traders thought the world was ending and in financial circles it felt like it. I remember distinctly one of the largest trading groups gave an order out to their traders:

Anyone selling options will be fired

Imagine what that did to the implied volatility, and of course it went straight up. I will call that trade gamma at any price, meaning the folks running that firm thought the market was going to move huge – three standard deviations or more – in a very short period of time.

And it did but straight … up.

The Invesco QQQ Trust (Ticker: QQQ) was up 100% in the year from that low point.

The chart below shows a winding up of volatility and a downward plunge in stocks – and many, many individual name volatilities look the same: Going sky high as if no move is big enough for option prices and no one wants to sell the juice.

SPDR S&P 500 Trust (Ticker: SPY) three-month chart with 10-day realized vol in white and 30-day IV at a three-month high on bottom half of chart

We have Russians, sky-high vol and potentially a conflict change on Friday coming from Putin himself.

Buckle up!

I still like long VIX, long SPY here. History has told me that works the best.

The Rundown

Power Income Trader

Bill booked a win in SPY Sept. 30 put spreads for a 45% gain.

Cap Gains

Bill, Frank and I closed out the Pro Shares UltraShort SPX ETF (Ticker: SPXU) call spreads for a 50% gain and now can ride our US Oil Trust (Ticker: USO) call calendars up.

To Your Trading Success,

AG