BY ANDREW GIOVINAZZI

August 15, 2023

Yo Pit Crazies,

In all my products, I stress that an option trade needs an opinion and an edge. An opinion is you think something will happen, and an edge is getting something for nothing.

An edge comes in many forms, but the easiest I can think of is what I pay for time. Sometimes, a 5 day option costs $5, $2, or $1 for the same strike on the same underlying. The trick is understanding when the $5 option is a good deal and the $1 option is a bad deal. Anyone can learn that if they choose to in OP Mentoring or any of our other services.

Below is a snap of the Edge Hunter Volatility Dashboard. Right now, it shows me the VIX futures are a little cheap for this much time to expire – or think of the VIX as too expensive.

Another way to say this is that options are a little expensive to what SPX is actually moving.  That means traders, by and large, are paying for options that aren’t really going anywhere.

Why is that?

Realized Volatility is Very Low in SPX

Realized volatility is just how much the underlying has moved in recent history. I view that as a head start, since most of the time I have observed after 30 years of looking at blinky lights that stocks have a tendency to act like they did yesterday.  

Until there is a reason not to.

For now, short term volatility is pushing up VIX, compressing the future premium, and historically something has to give. That flattens the forward volatility curve a touch.

Either VIX drops or SPX drops. FOMC minutes are this week and the market is looking for something giving us a bigger move. I’ll have to wait for the minutes to find out.

The Rundown

Win the Week

SPDR Homebuilders ETF (Ticker: XHB) Aug18 83/82 put vertical spread closed for a 14% gain

To Your Trading Success,

AG