What is a Special Situation?

Andrew Giovinazzi

BY ANDREW GIOVINAZZI

October 23, 2024

Yo Pit Crazies,

In case you have not been around here you might not have noticed Mark and I talking about how VIX and volatility is trading and making the market a relative snoozed fest with the election looming.

Listening to the pundits, you would think the two below are some kind of biblical antichrist the way some folks carry on. Both of them spent a lot of money and whoever is elected has a kettle of fish to fry. The perception is the thing that has messed folks up and sadly a relatively large number of people do have confidence in the voting results. Some of the voting laws in these states are not helping.

All of these things add to sentiment and it is not positive. The only positive thing is that it will be over. When I traded options as a pro, I traded sentiment and the change in sentiment. I still do. The option model was not meant to price sentiment. That is the trouble.

You can learn to price sentiment to help you make more money.

Here is how.

The Black Scholes Model (BSM) is meant to price an annualized volatility

That is a year and that is a long time. That is also a core assumption in the model and that is why Black-Scholes has so many adjustments to the volatility assumptions. The orange line is the assumption BSM makes and the green line is how the market actually prices things. Sentiment is not the same as a model assumption so remember that anytime someone says, “that is what the model produces.” The output is highly dependent on the assumptions and they can all be wrong.

Right now traders are pricing chaos post-election because stocks are not moving, VIX is 18, and no one is sure what will happen after Nov 5th. Once traders understand how the market prices sentiment and changes in sentiment, especially around events, things get a lot easier.

To Your Trading Success,