Volatility: Permanently Not Permanent

Yo Pit Crazies,


Last week, the Fed talked rate-raising gloom.


This week, the Fed speaks and we get SPX to the moon.


Lordy, I can’t keep up.


But volatility moves with it, like a wave in the ocean that goes up and down.


You just need to learn to ride the wave.


As the Beach Boys sang, “Catch a wave and you’re sitting on top of the world.”


I am hoping to catch Griff’s wave next week, but for this week it looks different.


Because volatility looks way different.




The S&P 500 (Ticker:SPX) July 16 straddle closed at $141 on Friday


SPX option July 16 cycle close on June 18.


The same straddle closed just under $100 on Tuesday!


SPX option July 16 cycle close on June 22.


That’s a $41 difference in just two trading days.


Now, Andrew, you say, there is a weekend!


Yes, but not a $40 weekend!


The liquidity providers took the air out of the balloon big time.


Powell did his work to manage expectations. The Fed has the ball and vol is gonna fall.  


I am riding the volatility wave down for this week and will most likely close 80% of my short vol positions.


The reason volatility dropped so much in the SPX at-the-money straddle is with Fed testimony done, there is less on the horizon and the market makers know this.


With three more trading days this week and little action, they will likely discount that straddle price further into Friday. 


If you knew you were going to buy options for 3 straight days, would you make them cheaper?

Yes you would.


The Lesson: Liquidity providers price volatility for the next move.



The Rundown


Power Moves Portfolio w/ Frank Gregory
Option Pit DC and Wall Street insider Frank Gregory and I run a portfolio approach to trading options with stocks that have good long-term prospects based on Frank’s K Street knowledge and my options expertise.


It’s Wednesday, and that means a Power Moves Portfolio update!

The live trade log is here,

We added a buy of two SPDR S&P 500 ETF Trust (Ticker: SPY) July 02 400-strike puts for $1.68 to the portfolio and sold the SPY June 25 puts this week at $.54.

I was up as much as $125 on the two-lot, but the rally is killing my puts for now.

Next week things can be much different..

I sold our Global X Cybersecurity ETF (Ticker: BUG) Sept. 17 28-strike put at $2. Frank and I are looking for other, more active cybersecurity plays but I think this one makes a good longer-term call play and will look for a pullback.

Interestingly, a number of trades we went back to — like Cleveland-Cliffs (Ticker: CLF), General Electric (Ticker: GE) and Taiwan Semiconductor (Ticker: TSM) — have pulled back. For the Power Moves Portfolio, in the future, I will wait for pullbacks instead of pressing in.

Here’s a rundown of the current lay of the land.

      • We own net calls in BWX Technologies (BWXT), GE, TSM and Palantir (Ticker: PLTR).
      • We own two SPY put calendar spreads around 400-strike and long five CLF June 25 19-strike puts.
      • We have some short put spreads for theta in GE and CLF now, which I might have to roll at this rate, after the July 16 expiry
      • I filled BWX Technologies (Ticker: BWXT) for now with a $.65 bid on the BWXT July16 65-strike calls and — ugh! — they are trading $.10 as anything remotely inflation oriented gets hit. I have some time to see how this shakes out. Too short a term, but the calls were/are a very low price.
      • We are back in CLF with a sale of five CLF July 16 15-/21-strike put spreads at $.96. I spent $.38 to hedge them as CLF dropped 20% in two days. After the Fed testimony, I expect CLF to head back to where it was.
      • GE is a play on green energy.  We own two GE Sept. 17 14-strike calls for a credit.  We added a sale of two GE July 16 12-/14-strike put spreads at $.62. The short puts are hurting here as GE is below $13.
      • We bought two TSM July 21 125-strike calls for $2.51. TSM as a stock has been tough, stalling at $119 twice. On the next TSM rally I will just close these calls and be done.
      • PLTR stock has stalled and we have just one call here and two puts. Stock is stuck and I will most likely just close the remaining calls this week. On the positive side, PLTR is just hanging around.

Pro Trading Room:
The Pro Room is Option Pit’s live access to Mark and myself during trading hours. Our Pro students post trade ideas with Mark and me during the entire trading session. 


An idea from around the room:


      • Netflix (Ticker: NFLX): Some of the Pros like this for a drop and bought some put butterflies. They did hedge upside — just in case.

Volatility Edge/Volatility Trading Club:
The Option Pit VIX Light is still red, and the Cboe Volatility Index (Ticker: VIX) broke 17 with huge drops in implied volatility in the major indexes. We could see COVID lows for VIX this week and that is a great place to close short vol positions.

Next week can be a whole new ballgame.

SPX rallied and VIX imploded in very normal market actions, as the VIX curve returned to normal contango.

For the Volatility Trading Club:


      • A new idea ws buying the iPath Series B S&P 500 VIX Short-Term Futures ETN (Ticker: VXX) June 25/July 09 30-strike put spreads for $.85 with a call hedge.
      • I started closing the puts here for a 30% gain and will try and ride to the end of the week.  The goal is to own the call for a large credit.

Remember, a lot of vol strategies I use are market neutral. That means whether SPX or VIX go up or down, the positions still make money. This is a technique you can learn in the Volatility Trading Club and Volatility Edge!

To Your Trading Success,


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