SPX Credit Spread Trader
- Thread starter El OchoCinco
- Start date
Interesting chart pattern on the SPX attached. Looks like we have entered into a consolidating triangle after the long run-up from OCT which could be resolved on today's FED news. Based on the triangle measureing characteristc that it is the half-way mark of a trend, it would forecast a continuation move to 1350 if it breaks out to the upside. That is quite bullish so I doubt it but in a more relevant sense a resolution to the upside forcasts a continuation of the uptrend unless that triangle is broken on the downside again.
So another reason I am hesitant to look to calls for JAN
Phil
So another reason I am hesitant to look to calls for JAN
Phil
Thanks MoMoney and Coach for your replies.
If you expect an immediate directional move in an index, then
if you select an option at the bottom of the smile, an increase or decrease in index price will cause the volatility to increase as the option move along the graph.... (In the case of a smile not skew graph)
eg: Jan oex 605 volatility = 8.15% IV
610 = 8.85
600 = 8.25
So, if this option moves immediately up, it gains from price and volatility. If it move down, the loss in delta is offset slightly by a gain in volatility................???
I noticed that not just the ATM options, but a range of Jan oex options from 575 to 620 have the lowest volatility (bottom of the smile).
So, if you anticipate a move up in the index the option which has the lowest volatility and which will move up the volatility curve earliest, will give you price increase because of delta and vega..........???
If you expect an immediate directional move in an index, then
if you select an option at the bottom of the smile, an increase or decrease in index price will cause the volatility to increase as the option move along the graph.... (In the case of a smile not skew graph)
eg: Jan oex 605 volatility = 8.15% IV
610 = 8.85
600 = 8.25
So, if this option moves immediately up, it gains from price and volatility. If it move down, the loss in delta is offset slightly by a gain in volatility................???
I noticed that not just the ATM options, but a range of Jan oex options from 575 to 620 have the lowest volatility (bottom of the smile).
So, if you anticipate a move up in the index the option which has the lowest volatility and which will move up the volatility curve earliest, will give you price increase because of delta and vega..........???
You have to remember that when the SPX moves higher IV tends to drop slightly and when the SPX drops the IV tends to increase. If oyu buy a call and the market drops the neg delta is stronger than pos vega so the call will lose money unless the IV surge is huge and the market move is slight.
A long call bought at the lowest end of volatility ATM will have a nice increase from delta if hte index moves higher but since IV rarely increases when the SPX moves higher, you will not get any boost from vega. Use the VIX or VXN and chart it with SPX movements to see the way IV changes to moves in the index. If you are going directional then ATM or ITM with the highest delta beats OTM. Vega depends on the direction since IV moves as described above.
I leave the more intelligent response to riskarb
A long call bought at the lowest end of volatility ATM will have a nice increase from delta if hte index moves higher but since IV rarely increases when the SPX moves higher, you will not get any boost from vega. Use the VIX or VXN and chart it with SPX movements to see the way IV changes to moves in the index. If you are going directional then ATM or ITM with the highest delta beats OTM. Vega depends on the direction since IV moves as described above.
I leave the more intelligent response to riskarb
On the TOS platform if you look at the volatility graph, it shows
When SPX moves up
say from 1200 to 1320, volatility decreases
BUT
When SPX move up
say from 1320 to 1375, volatility increases
So, I see volatility increasing as SPX moves higher for options from 1320 to 1375 or so.
So, if you buy in this range and the index moves up, you get delta and vega benefits (although gamma is low).
Is this correct, or am I missing something.....?
I am not sure how TOS can show IV increasing on theoretical values unless the assumption is that to get to 1320 to 1375 right now would require such a huge jump that it pushes IV higher. I would forget what a model shows you and simply look at the actual evidence comparing VIX/VXN to S&P graph and see what happens most of the time.
Yes. I've noticed that for directional moves ATM or ITM works best. But, the calls are expensive.
So, I was trying to buy OTM, but in the range where the option volatility increases with an index price increase.
that's an interesting thought......... I guess its the huge move that pushes IV higher.
Thanks, again Coach. Riskarb any thoughts on this subject?
With Quad Witching Day, I would expect enough market volatility to keep some premium in the near strikes. Again, that is why I mentioned that rules may go out the window on Quad Witching or if there is a major company announcing earnings. I would avoid holding any position unless you were at least 15 points OTM this Friday since we have been quite volatile and the Fed announcement could break us out of the consolidation I graphed and attached in the post above.