Current conditions--suggested option strategies?

J

jwcapital

As a group, we do not talk enough about current option strategies. What I mean is we don't analyse, as a group, where the current volatility rests--in relative terms or absolute terms, or even its trend. In the same breath, we don't discuss the trend of the underlying. We all know that directionality of the underlying and iv of the option are the most important factors in determining option strategy. Therefore, I am going to take a look at the current situation and offer my thoughts.

Currently, the VIX is below its mean (24) for the past six months. Short-term, the s&p emini is in an uptrend. There hasn't been a down day in the underlying or an up day in the vix for over two weeks. Options look cheap. I would buy puts--front-month, for I think there will be a sharp and swift correction. I would look for the vix to trend toward its norm before selling. I tend to follow the "three day rule" here--three days of increasing vix or three days of decreasing of the underlying. After I see this pattern I sell.

As an aside, corrections these days are fast and sharp--as are the rebounds..there do not seem to be anymore formations of healthy bases after corrections, just fast bounces. Therefore, holding these options for long is a mistake. I appreciate any criticisms of my suggestion as well as your original thoughts on current strategy.
 
i am looking at bear call spreads on indexes or etfs. you earn income while you wait for the market to correct. if/when it corrects your position become more favorable to you allowing you to close it out and go the other way at the right time.
 
It is not enough to pick direction..the volatility matters as well..and getting out when your goal is reached. Options do not have to be held to expiration. Take yesterday. The front-month ATM put option increased by 8 points. If trading s&p emini futures options, that translates into a $400.00 profit for just one option. I will probably look to exit today if we get another big volatility up day. If not, I will probably exit for a small gain. If we do get another volatility spike today..not only will I exit the long put, I will place the reverse call or put calendar spread to ride the volatility crush afterwards. Again, if the trade doesn't go according to plan, I look to exit witheither a small loss or a small gain.

With the bear call spread, I would exit when volatility spikes..as above, get out with a profit. Once volatility drops, your bear call spreads will get beat.
 
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