Jump to content
Sign in to follow this  
drbubb

OPTIONS, the Skew, VIX, and Strangle Trades

Recommended Posts

OPTIONS, the Skew, VIX, and Strangle Trades

 

The recent hig "skew" near 150% (per podcast):

+ how is it measured?

+ is it really a precursor of a downturn?

 

The Last Two Times The ‘SKEW’ Was This High Market Plunged – Episode 1185

Podcast: Play in new window | Download (Duration: 35:06 — 41.2MB)

youtube_website_skew2.jpg

.

IBM promises to hire 25,000 employees as they continually layoff employees. Trump signs 3 executive orders, dumping the TPP, federal hiring freeze and limiting abortion funding overseas. The US is in the top 10 list of debtor nations. Shiller warns the Trump effect in the stock market is based on an illusion.

 

The SKEW is way above 100. Last-time this happened the market plunged. Trump signs executive order to ease Obamacare and will let states decide to keep it or not. WikiLeaks says they will hack Trump to expose his tax returns. President Trump Attorney General will keep the surveillance state. Proposed CIA Chief will continue to spy on Americans. CEO’s (elite) in Davos believe they have Trump under their control.New bill proposes the US to leave the UN. Ukraine allegedly found missile components on a plane headed to Iran. Russia will keep missiles in Kaliningrad . Russia says US joined with them to bomb ISIS, the Pentagon says no. Aircraft carriers are now returning to the middle east.

 

===

THE SKEW : Puts / Calls

 

Strike-: %-Atm : -Mar- : -Jun- : -Sep- : -Dec- : As-% : Sqrt(T)
$255c : 112.0% : $0.03 : $0.17 : $0.65 : $1.53 :
$245c : 107.7% : $0.10 : $0.70 : $2.11 : $3.82 :
$235c : 103.3% : $0.80 : $3.16 : $5.65 : $7.82 :
= ATM : 227.60 >$4.00 : $7.40 : 10.00 : 13.00 : 5.71% /95.1%= 6.00% > 15.0%
$220p : 96.66% : $2.17 : $5.38 : $8.25 : 10.73 :
$210p : 92.27% : $0.98 : $3.35 : $5.76 : $7.94 :
$200p : 87.87% : $0.50 : $2.12 : $4.02 : $5.81 :
D/Uratio
: Near : --- Pct. > 271.3 : 170.3 : 146.0 : 137.2 :
: Mid - : ---- Pct. > 980.0 : 478.6 : 273.0 : 207.9 :
: Far - : ---- Pct. > 1667. : 1247. : 618.5 : 379.7 :

Share this post


Link to post
Share on other sites

With VIX down to Below 11%...

The time to buy Straddles or Strangles is fast approaching

 

SPY: 229.57 +1.97 : +0.87% / Open: 228.70 / High: 229.57 / Low: 228.51
VIX : V10.81 -0.26 : - 2.35% / Open: 10.79 / High: 11.05 / Low: 10.51

 

VIX / Volatility Index ... 5-yrs : 2-yrs : 6-mos / 10-d

VIX-2yr_zpsxbjymzmm.gif

 

I cannot say which way this market will go, but a cheap straddle may give a profit opportunity if it moves either way.

Following is Tony C's latest - and he is bullish, and if he is right that would favor cheap calls. Many others see Bear moves ahead

 

Tony Caldaro:

The market gapped up at the open for the first time this week. We had a gap up opening on Friday that was sold within the opening minutes. After the opening the market continued to rally, with only two 4 point pullbacks, and hit SPX 2300 just before the close. New all-time highs today, and closing highs, in all four major indices. This is the first time both of these events have occurred together since mid-December. The uptrend may be extending after a period of sideways choppy consolidation. We are still holding to the possibility that this rally is a B wave that started at SPX 2234 (see SPX charts). The upside limit remains SPX 2305 for this scenario. Should the market exceed that level, then it is possible that Minute iii is underway (see DOW charts). Either way, it remains a bull market. Short term support is now at the OEW 2286 and 2270 pivots, with resistance at the 2321 pivot. Short term momentum remained pegged at extremely overbought all day, and now displays a slight negative divergence. Best to your trading!

MEDIUM TERM: uptrend

LONG TERM: uptrend

==

> https://caldaro.wordpress.com/2017/01/25/wednesday-update-580/

 

Stocks up : $1.97 > $229.57 by 0.87%

VIX down : V 10.81 -0.26 : by -2.35% / Low: 10.51

 

Grid - : 229.57 : 1/25
Strad : - ATM- : $8.02 : $14.80 : $19.70 : 25.40 :
AsPct : 229.57 : 3.49% : 6.45%: 8.58% : 11.06%:
Days2 : Mature : 051d : 145ds : 235ds : 325ds :
SqRtT : %365d : 37.4%: 63.0% : 80.2% : 94.5% :
Ann-d: ======> 9.33% : 10.2% : 10.7% : 11.7% :
/80%-: VIX eqv: 11.7% : 12.8% : 13.4% : 14.6% :
StrgN : >6.57% : $3.07 : $8.75 : 14.07 : 18.70 :
StrgM : >15.2% : $0.93 : $3.92 : $7.87 : 11.78 :
StrgF : > 24.1% : $0.44 : $1.10 : $4.51 : $6.22 :
-
Strike : %- Atm : -Mar- : -Jun- : -Sep- : -Dec- : As-%: Sqrt(T) : then... / 40%
$255c : 111.1% : $0.04 : $0.24 : $0.82 : $1.86 :
$245c : 106.7% : $0.15 : $0.96 : $2.61 : $4.44 :
$235c : 102.4% : $1.32 : $3.95 : $6.50 : $8.74 :
= ATM : 229.57 >$4.01 : $7.40 : $9.85 : 12.70 : 5.53% /94.5%= 5.85% > 14.6%
$220p : 95.83% : $1.75 : $4.80 : $7.57 : $9.96 :
$210p : 91.48% : $0.78 : $2.96 : $5.26 : $7.34 :
$200p : 87.11% : $0.40 : $1.86 : $3.69 : $5.36 :
======
OLD- : 227.60
StrgN : :
StrgM :
$255c : 112.0% : $0.03 : $0.17 : $0.65 : $1.53 :
$245c : 107.7% : $0.10 : $0.70 : $2.11 : $3.82 :
$235c : 103.3% : $0.80 : $3.16 : $5.65 : $7.82 :
= ATM : 227.60 >$4.00 : $7.40 : 10.00 : 13.00 : 5.71% /95.1%= 6.00% > 15.0%
$220p : 96.66% : $2.17 : $5.38 : $8.25 : 10.73 :
$210p : 92.27% : $0.98 : $3.35 : $5.76 : $7.94 :
$200p : 87.87% : $0.50 : $2.12 : $4.02 : $5.81 :
D/Uratio
: Near : ---- Pct.> R2.71 : r1.70 : R1.46 : r1.37 :
: Mid - : ---- Pct.> 980.0 : 478.6 : 273.0 : 207.9 :
: Far - : ---- Pct.> 1667. : 1247. : 618.5 : 379.7 :
=====;
Buy: Sep.240p @$18.30 / Sell: Jun.210p @$3.35 ; net $15, to make $30
===============

Share this post


Link to post
Share on other sites

FatTail_zps6np0r636.gif

 

The Structure of the "Tails" - shows FAT on Downside

 

/ Image here /

 

VIX at 10.81%

 

Strad : - ATM- : $8.02 : $14.80 : $19.70 : 25.40 :
AsPct : 229.57 : 3.49% : 6.45%: 8.58% : 11.06%:
Days2 : Mature : 051d : 145ds : 235ds : 325ds :
SqRtT : %365d : 37.4%: 63.0% : 80.2% : 94.5% :
Ann-d: ======> 9.33% : 10.2% : 10.7% : 11.7% :
/80%-: VIX eqv: 11.7% : 12.8% : 13.4% : 14.6% :

 

/ Image here /

 

Strike : %- Atm : -Mar- : -Jun- : -Sep- : -Dec- :

Strad : - ATM- : $8.02 : $14.80 : $19.70 : 25.40 :
StrgN : > 6.57% : $3.07 : $8.75 : 14.07 : 18.70 :
StrgM : >15.2% : $0.93 : $3.92 : $7.87 : 11.78 :

 

Strike-: %-Atm : -Mar- : -Jun- : -Sep- : -Dec- :

As Pct : 229.57: 3.49% : 6.45%: 8.58%: 11.06%:

Stradd : -ATM- : $8.02 : 14.80 : 19.70 : 25.40 :
StrgN : >6.57% : $3.07 : $8.75 : 14.07 : 18.70 :
---------> -------- : 38.3%: 59.2%: 71.4%: 73.6% :
StrgM : >15.2% : $0.93 : $3.92 : $7.87 : 11.78 :
---------> -------- : 11.6%: 26.5%: 39.9%: 46.4% :
StrgF : > 24.1% : $0.44 : $1.10 : $4.51 : $6.22 :
---------> -------- : 05.5%: 07.4%: 22.9%: 24.5% :

Share this post


Link to post
Share on other sites

(Diagram and Pricing done at middle of last week, with SPY near $230. VIX under 11%):

 

FatTail2c_zps367p5ehq.png

 

Capturing the value of cheap VIX: 10d-chart

VIX-10d_zpsul80kqkr.gif

 

(with Prices based on my spreadsheet from last week, 1/25/17 )
Buy a Dec ATM Straddle, paying 5.5% x 2 = 11%, or $230 x 11% = $25.30

 

( compare Friday's actual Dec.$230 straddle: Put: $13.97 + Call: $11.34 = $25.31 )
Sell a Dec Strangle, to recover about 76% of the premium, 11% x 76% = 8.4%, or 4.2% each = about $9.65 each side = $19.30, $6.00 net
Eyeballing the diagram, the appropriate Strike prices might be:
+ Sell: Put $230 x 96.2 % = $221.3 = Friday: $221p = $10.61 / $218p = $9.70
+ Sell: Call $230 x 102.7% = $236.2 = Friday: $236c = $8.12 / $233c = $9.66
+ Total: 218p+233c Straddle = $19.36 (8.42% of $230; 76.5% of $25.31)

=====
If VIX remains where it is (just under 11%), and SPY is unchanged, then this structure would be worth:
+ In 3 mos.: $230-strad: $230 x 4.4% x 2 = $20.20 : Less (Put: 3.00%= $6.90; Call: 2.90%= $6.70) = $6.60 Net
+ In 6 mos.: $230-strad: $230 x 3.2% x 2 = $14.70 : Less (Put: 1.65%= $3.80; Call: 1.50%= $3.45) = $7.45 Net
+ In 9 mos.: $230-strad: $230 x 1.7% x 2 = $08.00 : Less (Put: 0.40%= $0.90; Call: 0.45%= $1.00) = $6.10 Net
=========

i.e. Six months, of reasonably stable valuations, if the market stays range bound. and VIX doesn't move much.
There are other ways to win...
Prices can move outside the current range, pumping up the value of the Put or Call, or
Volatility can move up, increasing the value of the straddle more than the put/call strangle


Share this post


Link to post
Share on other sites

With everything Trump has said in terms of interest rates,the stock market protecting US jobs etc etc,it amazes me that Wall St is feeling so bullish.The days of cheap labour and arbitrages are gone I suspect.Vix at 11???

 

I hold a number of positions but these days am always covered with some deep out of the money puts if things go pear shaped.

Share this post


Link to post
Share on other sites

These days am always covered with some deep out of the money puts if things go pear shaped..

 

The Deep out of the Money puts are not so cheap, even though VIX is Low, because of the crooked "smile"

You might think about spending the same money, but buy a small number of Puts, at a higher strike

Share this post


Link to post
Share on other sites

Volatility Index takes flight, S&P 500 ventures under the breakout point MarketWatch

 

MW-FE702_201701_20170130092509_NS.gif?uu

 

U.S. stocks are firmly lower early Monday, pressured amid uncertainty regarding the U.S. travel ban, and ahead of the Federal Reserve’s policy directive, due out Wednesday. In the process, the S&P 500 has ventured under its breakout point — S&P 2,277 — against the backdrop of several equally notable technical tests across the major U.S. benchmarks.

 

VIX rise was not so huge as the headline makes it sound: Just back to the level of 10/19-10/20

 

19: 225.91 - 0.84: 00.0M: 12.78 : 22.88 - 0.13: 114.78 - 0.09 0.00M: 1201.5 : $52.12* 101.17 - 0.12 : 120.18 - 0.24 /
20: 226.74 +0.83: 108.M: 11.54 : 23.12 +0.24: 115.05 +0.28 10.9M: 1204.9 : $53.22* 100.81 - 0.36 : 119.94 - 0.24 /
23: 226.15 - 0.59: 65.7M: 11.77 : 23.81 +0.69: 115.79 +0.74 6.13M: 1215.6 : $52.75* $99.97 - 0.66 : 121.14 +1.20 /
24: 227.60 +1.45: 81.2M: 11.07 : 23.83 +0.02: 115.27 - 0.52 5.55M: 1210.8 : $53.19* 100.24 +0.27 : 120.31 - 0.83/ 00, 098 : 000, 4482
25: 229.57 +1.97: 67.2M: 10.81 : 23.47 - 0.36: 114.32 - 0.95 6.67M: 1197.8 : $52.75* $99.88 -0.36 : 118.80 - 1.51/ 06, 104 : 312, 4800
26: 229.33 - 0.24 53.0M: 10.63 : 22.87 - 0.60: 113.26 - 1.06 5.34M: 1189.8 : $53.78* 100.64 +0.76 : 119.20 +0.40/ 02, 106 : 250, 5050
27: 228.97 - 0.36 46.2M: 10.58 : 23.22 +0.35: 113.49 +0.23 6.36M: 1188.4 : $53.17* 100.56 - 0.08 : 119.63 +0.43/ 03, 109 : 270, 5320
30: 227.55 - 1.42 70.0M: 11.88 : 23.15 - 0.07: 113.97 +0.48 6,.87M: 1196.0 : $52.63* 100.36 - 0.20 : 119.27 - 0.36/ 00, 112 : 000, 5,700

=========================

 

What happened to the price of the SPY-Dec.230 straddle?

 

Dec'17-230 : P: 14.63 / C: 10.62 = $25.25; was $25.31 on friday
Jan'18 -230 : P: 15.05 / C: 11.06 = $26.13, was $XX

Share this post


Link to post
Share on other sites

COMPARISON:

 

It would have be tough to make money Buying Options

 

On a SPY-$1.50 down move in stocks. and a 1.18 pct point move up in VIX

 

Strike/ pct : -mar : -june : - sep : -dec- : - jan :
Wd-straddle $7.82 : 14.77 : 19.70 : 25.50 : 26.20 > vix-10.81 (01/25)
256 112% : $0.04 : $0.18 : $0.74 : $1.70 : $1.82 :
247 108% : $0.05 : $0.58 : $2.20 : $3.71 : $3.95 :
238 104% : $0.53 : $2.58 : $4.62 : $7.17 : $7.59 :
Atm $229 : ===== : ===== : ===== : ===== : ===== :
220 096% : $1.72 : $4.94 : $7.79 : 10.30 : 11.02 :
211 092% : $0.81 : $3.20 : $5.61 : $7.81 : $8.20 :
202 088% : $0.43 : $2.09 : $3.76 : $5.95 : $6.30 :
========

 

Tu-straddle $7.91 : 15.70 : 20.34 : 25.24 : 26.07 > vix-11.99 (01/31)
256 000% : $0.03 : $0.13 : $0.58 : $1.50 : $1.60 :
246 000% : $0.08 : $0.53 : $0.90 : $3.30 : $3.90 :
238 000% : $0.36 : $2.16 : $4.10 : $6.55 : $6.95 :
Atm227.5 : ===== :
220 000% : $2.08 : $5.43 : $8.31 : 10.84 : 11.20 :
211 000% : $0.98 : $3.53 : $6.00 : $8.22 : $8.58 :
202 000% : $0.51 : $2.30 : $4.06 : $6.24 : $6.60 :
========

Share this post


Link to post
Share on other sites

Checking out the SPY - Jan. $230 Straddle

 

$230 Call ($11.46) + $230 Put ($14.13) = $25.59 ... / $230 = 11.12% /.80% = 13.90%

 

$230 Call / SPYA19183230000... update : Last = $11.46

SPY-jan230C_zpsus03onkq.gif

 

$230 Put / SPYM19183230000 ... update : Log : Last = $14.13

SPY-jan230P_zps1y9wzkjz.gif

 

VIX / Volatility ... update : Last = 11.45%

VIX-12mo_zpsnezbgnl9.gif

Share this post


Link to post
Share on other sites

STRADDLES are cheaper at higher prices... in this present market

 

After yesterday's : +0.59% rise in SPY to $230.60

 

SPY-- ... update : last: 230.60 + 1.36 / VIX: 10.88% on short dated options

Volume: 59,270,013 (not heavy)

 

SPY-12mo_zps568noy4w.gif

 

SPY Straddles ---------------------------------- = Pct x Sqrt(350/365)

Mo.Strike : Calls + + Puts = Straddle /Spy = Pct. : Time adj.= 1yr.Eqv > Imp.Vol: %Call
jan-230/ C: 12.31 + P: 13.42 = 25.73 /230.6 = 11.16% / (0.979) = 11.40% > 14.25% : 47.8%
jan-235/ C: $9.48 + P: 15.68 = 25.18 /230.6 = 10.92% / (0.979) = 11.15% > 13.94% : 37.6%
jan-240/ C: $6.06 + P: 18.27 = 24.33 /230.6 = 10.55% / (0.979) = 10.78% > 13.47% : 24.91%

========

 

If SPY rises by$1.40 to $232.00 to near resistance (expected at $232.5/233),

then the Jan-240 Put may fall by $1.40 x 75%, or about $1 to; $17.30

 

SPY - Jan.$240 Put ... update : last 18.10 - 0.95

SPY-jan240PLog_zpsjjxsvaxw.gif

 

Tony C's comment

 

The market opened higher today, and for the fifth time in two weeks it traded up to the SPX 2298-2301 area. Then it broke out. The rally also carried the SPX past the 2305 level before 11am, eliminating the potential irregular B wave scenario. We then updated the SPX short term charts to display only the count that was posted in orange: Micro 3 of Minute iii underway. Since this should be a third of a third rally, it should act like a third wave. It should not revisit yesterday’s SPX 2285 low. If it does, then the 2321 and 2336 pivots will offer stiff resistance for this uptrend. Short term support is now at the 2286 and 2270 pivots, with resistance at the 2321 and 2336 pivots. Short term momentum hit extremely overbought at today’s high, then ended with a slight negative divergence. Best to your trading!

MEDIUM TERM: uptrend

 

> https://caldaro.wordpress.com/2017/02/09/thursday-update-567/

 

https://www.tradingview.com/x/kKVV30zh/

Share this post


Link to post
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
Sign in to follow this  

×