Straddles

With the implied volatility of the S&P 500 Index (as represented by the VIX) touching 18 and the 20 day Realized Volatility down at around 8%, I’ve been hearing quite a bit from students and colleagues about long gamma positions – straddles in particular.  The idea is that volatility is so low that options are under-priced and should be purchased in bulk to profit from the impending price explosion. Without necessarily arguing for or against that position, what follows are some thoughts on what I believe to be very basic options strategy. The purpose of the straddle is to profit from either a gain in Implied Volatility or Realized Volatility (ie:  a sudden change price movement).  Since most beginning traders buy straddles in the hope of cashing in on an unforeseen breakout, it makes sense to begin with a quick discussion on realized (historical) volatility.

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Credit Spread Adjustments: Delta Hedging with Stock

One of the most effective ways to adjust a broken out-of-the-money vertical spread is with stock.  So many of us in the retail world—having been introduced to the flexibility and/ or leverage of options—seem hotly opposed to taking a position in an underlying stock, ETF or future.  Many of us would rather torment a simple vertical spread with layer upon layer of complicated adjustments, so that what started out as a hands-off strategy becomes a position that must be constantly tweaked—the original thesis for the trade reduced to a footnote.

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Friday's 13.8% VIX Slammer!

I’ve noticed a prevalence of commentary over the weekend by pundits, bloggers, tweeters and the like talking about how Friday’s near 14% drop in the VIX was a strong indicator that S&P 500 Index is positioned for a magnificent Santa Claus rally into the holidays.  While it’s certainly true that Friday's VIX drop was enormous compared to the 1.7% rise in SPX, there are two points that can’t be ignored:

The normal post-event volatility collapse

Just like an earnings event, the lead up into the European Summit included a rise in volatility.  I apologize if I’m pointing out the obvious, but note that both the VIX and the SPX were up on Monday, Tuesday and Wednesday.  This unusual occurrence is not unusual at all leading into an event such as earnings, as traders buy protection against a violent price move.

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Quick Thoughts on Credit Spreads in Today's Market

The 2+ standard deviation move yesterday and the looming Fibonacci resistance at the 1257 signify to me that price will probably relax for the next couple of days and perhaps pull back some.  The fact is that even with yesterday's liquidity push, Europe still has a solvency crisis that pundits are looking to big strides towards solving by the end of the Brussels summit on Dec 8th & 9th.

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