Investing With Options header image ≡ Menu

Join Our New Course "Real World Crash Course in Options Trading" for Free!

This video course will show you…

  • How To Make Money With Options
  • How Options Are Priced
  • My Favorite Trading Strategies
  • …And Much More!

The Great Holiday Volatility Crush

crushWelcome to the shakeout.

The investor zeitgeist is currently obsessed with two things:

  1. High yield debt
  2. Fed raising rates

The outcome of the Fed is what we would call a "known unknown."

If you have some magical crystal ball that will tell you exactly what the fed will do and how the market will react to it...

... you probably paid too much for it.

We don't know how the market is going to react to the Fed. The consensus is that Rate Hike = Bad and No Hike = Good-- but how many times have we seen the reaction to the Fed meeting be one giant stop-run, fade and reversal?

Instead of trying to predict where stocks are headed, how about we focus on the volatility markets.

The Current Readings

Equity volatility is being pumped up as the Fed outcome is being treated as an earnings-like outcome for the markets.

At the time of this writing, VXST (short term volatility) is at 28% and the VIX is at 24%.

Contrast that with the actual volatility in the market which is sitting at 15%.

That's a pretty hefty premium.

My End of Year Volatility Predictions

Volatility will spike but only for a day or so. After that, the actual volatility in the market will head back to 10% or so.

Remember, after the fed meeting we've got a week then Christmas. Overall trade and liquidity will wind down as trade books close and fund managers wrap up their

As the main risk event investors are concerned about is the Fed, the need for post-Fed protection will be less. The holiday trading season will get priced in and we'll see the VIX head lower. January SPX options and VIX futures will also see their premium levels drop.

If anyone buys protection it's going to be out in February. That will coincide with the start of earnings season for stocks. On top of that, the next Fed meeting will be at the end of January, which is after options expiration.

Looking at the VIX futures curve, here's what I expect:


Technically, December VIX futures expire before the Fed meeting but the overall idea here is that:

  1. Near term vol goes down
  2. Jan vol goes down
  3. Feb vol probably heads lower but stays bid relative to jan
  4. VIX futures curve will head back into contango

What If I'm Wrong

My opinion is that the current premiums being traded in stock options is very rich and will not be justified.

And remember...

the only way for it to be justified is if we actually see a larger volatility move than what the market is pricing in.

As an example, the SPX Dec options chain is pricing in about 50 handles worth of movement.


If you think we can move bigger, then you should be buying the straddles right now.

It's possible that this trade thesis doesn't pan out.

I believe that the only way I'm wrong is if we see a non-fed catalyst come out.

It would have to do something with the high yield debt risk spilling over, or potentially a large oil firm that surprises with ugly guidance.

Maybe something out of a BRIC nation. But none of those catalysts are really expected until the beginning of the new year.

How to Position Into It

I've already structured trades into this trade thesis, let's have a look at a few:

Sell Put Spreads In Relative Strength Names. It's easier to hunt for a bottom in stocks like FB and AMZN than it is in the S&P 500. Good stock selection has worked great in 2015 and I expect it to continue into the end of the year.

Shorting VXX. I'm not going crazy short here, but I do have some smart limited risk plays that profit if VXX starts to trade lower.

Income Trades in Jan and Feb. Take advantage of the high option premiums and the holiday trading season by deploying iron condors, butterflies, and calendars. Don't overstay your welcome and look to scale in if we do end up seeing a big move.


Why is the Market So Wide On Options?

Some days, it feels like you're just getting screwed.

You get bullish on a stock, so you put an order in to buy a call. The bid/ask spread is .50 wide, which means if you use a market order you're already down $25 against the mid.

Instead, you opt for bidding at the mid... but no fills. Instead, a rush of orders come in exactly at the price you wanted. And they end up getting filled before you!

While you're sitting there for a fill, the stock ends up taking off without you. And a missed opportunity can feel just as bad as a losing trade.

The Stock Is Wide So The Options Are Wide

Many times, the option market is very wide because the stock market is very wide.

Take an example like AMZN. At the time of this writing it's trading in the 500s which is pretty high relative to most of the market. Keep in mind, this doesn't include considerations like market cap, just that a single share will cost you $500.

Here's a look at the order book of AMZN:


This was taken at the open and the market was pretty thin to begin with... but let's use these quotes as a jumping off point.

Say you went out and bought an at the money call at market, which guarantees a fill at whatever the asking price is. Because the call is ATM, it's going to have a delta of 50. This leaves the market maker net short 50 shares.

In order to balance that exposure out, the market maker can either use other positions on their book, or they can go buy 50 shares of stock on the open market.

The market's bid/ask is 544.35 x 544.87. That means the spread is 0.52 wide. And that's only on 2 lots to the bid and 1 lot on the ask. If you had to buy 500 shares at what the market is currently showing, that last round is 544.02 on the bid and 545.88 on the ask-- a spread of 1.86.

This calculation assumes that there's no hidden liquidity (which there is) or that more bids won't step up (which they will).

Go back to the market maker with a net exposure of -50. If they were to immediately get flat using a market order, they're already at a $26 disadvantage in the market just due to slippage.

In order to adjust for that slippage, the market maker will only put quotes out at levels that compensate for the slippage in the stock market.

You'll see this more on large priced stocks like AAPL CMG AMZN and NFLX. And it becomes even more pronounced on stocks that don't trade much volume to begin with.

If you're seeing a not-so-liquid options market, it's probably because the stock liquidity isn't that great either.

Markets are More Inbred

With more and more algorithmic trading, you end up with the robots trading against each other in the same markets.

On the stock side, two great examples are SIRI and AMD. They are both large companies, but the stocks trade under $5. And they trade 10s of millions of shares per day.

I have a suspicion that the overall order flow is not due to large institutions getting in and out of the stock, but algorithmic trades using a combination of market microstructure and exchange rebates to milk the market.

We then end up with stocks that generate liquidity inbreeding.

Same thing happens in the options market.

The popularity of certain stocks and etf's mean that 80% of the liquidity is in 20% of the market.

It ebbs and flows, of course. I remember back in 2007 during the big commodities boom ag stocks like POT, MOS, and MON were all the rage and had super liquid markets.

Right now it seems that most of the liquidity for options are in high beta tech stocks.

The liquidity inbreeding becomes even more pronounced when we look at options duration.

Everyone and their mother now trades weekly options. Some people like them for the amount of leverage you can get relative to total capital, others like how fast the theta comes in.

This ends up leaving longer duration options as a ghost town

What You Can Do About It

The first thing you should cut out is whining. If you think you're going to get screwed by the market, you get screwed. It becomes a self-fulfilling prophecy as it affects your psychology and how you approach risk.

Embrace the matra of "it is what it is."

If you don't want to follow the liquidity and trade weekly options, here are some tweaks to your trading to consider.

Trade Like a Market Maker

Instead of forcing trades, you can let the market come to you. Odds are if you're chasing a stock higher, it'll come back to your original price just given the natural volatility of the stock.

If you're trading option spreads, you should figure out the price given certain conditions and float orders out accordingly.

Change Your Execution Strategy

Novice option traders treat the market as an "all in, all out" kind of scenario. I think you can get a better edge through use of scaling in and out, taking advantage of the wide bid/ask spreads and the natural volatility of the market.

Believe it or not, there is liquidity in wide options especially if you are selling risk.

Think about it: if you are an institution with a ton of size in a stock and you want to hedge, you don't really want to use weekly options because they only give you 5 days' worth of hedging. There's demand in longer dated options if you are willing to step up and sell that risk.

Use Liquidity Pings

This is very useful on very wide markets like cash settled indexes (SPX, RUT, NDX).

When the bid/ask is really wide, the only way to find the true price of the market is to probe for it. If you put an order out and it's immediately filled, then try for a better price on your next round.

But if nobody is filling your order, you may want to consider walking the order until you find a fill. If the price isn't what you want then you'll want to consider avoiding the trade or using a different option strategy.

A Series of Unfortunate Risks

It's been a little over a month since the market crashed.

Quite a wild trip it's been.

I'd like to walk you through all the thoughts I had leading up to, during, and after that time to give you some insight into how I approach the markets and some of the absurdity you experience when trading.

Let's get started...

Markets Were Stupid Quiet

For the first 7 months of the year, the Dow Jones had been in the Tightest. Range. Ever.

In history.

For more context, here's a chart showing the Bollinger Band width of the SPX on a weekly chart.


Bollinger Bands can show you the expected volatility relative to what we've seen in the past.

In simpler terms, it was the smallest non-reverting volatility-- in at least 20 years.

It had been a “golden age” for income trading. Iron condors were profitable and boring.

Boring is good.

Just like markets, volatility moves in cycles. So when you have vol low for too long, you should expect and anticipate volatility expansion.

So yeah I expected a shake and bake, maybe a "normal" correction... but not this.

Old Man Newsletters Demolished

Fear sells. If you’re scared, you are more likely to plunk down a couple hundred bucks to have some guy tell you exactly what you want to hear politically and give you advice about how to protect yourself against the fall of the West.

Their recommendations:

  • Gold
  • Gold Miners
  • Silver
  • Oil MLPs

I don’t need to put any charts up to show you how those have fared.

Breadth Sucks, Half Of Market Already In A Bear

Rightfully so, many bearishly inclined investors pointed out how the markets were riding on the backs of fewer and fewer stocks.


High beta tech and biotech were holding up the Nasdaq, and momentum on earnings was keeping the Dow elevated.

In the meantime, commodity stocks continued to be bludgeoned by the strong dollar and weak oil. By the time the crash came, oil stocks were already in a mature bear market.

And emerging markets were pretty ugly, which leads us into...

Dollar Denominated Debt Becomes a Risk

Similar to the 1997 Asian financial crisis, you had too much emerging debt that had to be paid back in dollars.

And if the dollar is strong, it becomes harder to sell things in a local currency and pay back the debt in dollars.

Here’s a chart of the dollar since 2014:


Basically, this theme was hanging on by a thread.

Speaking of Debt...

Oil has been in a bear market.

On the supply side, we've had a massive increase in oil shale tech that's come online.

On the demand side, China was weak.

During this "shale revolution" there was a ton of high yield debt issued for O&G companies. At current oil prices, many of these companies can't pay off the debt from selling the stuff they pull out of the ground.

Here's a chart of the performance of high yield debt compared to the 10 year yield:


It's been ugly for a while.

And that's the thing! If you were short because of terrible breadth or credit market risks, you were months early. Timing still mattersn.

The Fed Got Faded

A key “warning signal” was back in Aug when there was a Fed meeting. The FOMC minutes came out and it was what the market wanted, but after a short lived rally the market continued to find sellers and selling led to more selling.

This in and of itself would have probably set off a “normal” correction, but then...

China Currency Explosion

China revalued their currency. Everything starts to smell of 1997, or potentially like 1998 when Russia devalued the ruble.

Way too many people are leaning the wrong way, and there’s no liquidity. We know how this played out.

Circuit Breakers Fail to Properly Flush The Market

Then the markets crashed.

A 10% pullback is pretty normal for stocks to have in a year. I think the average is something like -12%.

But to have it all in a 5 day period is pretty unprecedented.

So we come into Monday and futures are accelerating to the downside. Then they hit circuit breakers.

And in comes a liquidity issue.

Individual stocks and ETF’s see massive gaps lower. But even if you wanted to buy the dip, you really couldn’t.

The options market didn’t open for an hour after the open. Stocks were moving so fast that unless you had market buy orders on the open you didn’t get a chance to buy AAPL at 95 or FB at 75.

It was a crash that left the profits only to large institutions.

This is my surprised face.

The Analogs Come Into Play

As we have a tendency to do, humans search for patterns.

So everyone starts looking at past crashes to see if history will rhyme.

2011, 2008, 1998, 1997, 1987, and so on.

Ray Dalio event went as far back as 1937, talking about how Fed policy is similar to that.

Given how the market’s trading now, this feels more like 2011 or 1998. We’ll see how we trade into the end of the year.

Everyone Becomes An Expert in Everything

High volatility markets cause you to look at your assumptions. Is your investment or trading strategy sound? Are you taking on too much risk? What is your blind spot?

Thankfully, you have plenty of newly minted experts that are willing to open their mouth and sing songs about things they are totally unqualified to talk about.

I’d like to think I’m an expert in the VIX. I’ve analyzed it to death and actively trade vol instruments.

So when people start talking about an inverse head and shoulders in the VIX, I end up with a nervous tick.

And when people give opinions about the VXX without knowing how volatility futures come into play, I feel bad.

It wasn’t just in vol products.

Fund managers that normally scoff at technical analysis start using the word “oversold.”

Everyone became an expert in seasonality, sentiment, statistics, credit markets, Fed policy, ETF inflows, oil, the carry trade, options order flow… basically everything.

Because when markets are moving 1% a day there must be a reason for every single little tick.

Risk Parity Sucked - No Hedges Worked

A Well Balanced Portfolio.

Ideally you’d have some asset that protected you into the crash.


Treasuries sucked.

Gold sucked.

Basically the only thing that worked was long Yen or long vol.

And boy did long vol work.

Volatility Instruments Are Now Over Subscribed

There’s been a continuing shift out of vanilla hedging instruments like SPX puts, while more and more institutional players are using VIX products to protect against downside.

I’ve noticed it all year, where any decent pullback led to an over-sensitive move in the VIX.

The thing is, there’s only so many people that can get involved with vol products before liquidity runs out.

And that’s what happened.

Here’s a chart of VVIX -- it shows the demand for VIX options:


That’s the largest value ever. Even more than the 2008 crash.

Expect this trend of sensitivity to continue-- and realize that "smart money" really doesn't exist any more on the options market as a whole.

There’s Now Only One Bull Market

The only thing that seems to be working is One-Week Fantasy. Seriously, it’s been just a few weeks into football season and I’m exhausted seeing DraftKings ads.

Too Many Overhedged, Leads to Opex Rally

Often when you have a spike in the VIX like we did, you end up with way too many investors hedged and underexposed to the downside.

If people buy premium to reduce risk, then they don’t have fear of risk, which leads to a lack of downside fear.

Which means the market won’t trade to the downside hard again until all that premium burns off.

Here’s a chart of the SPX, with September options expiration highlighted.


Now that the market sold off aggressively and more people bought premium, I would not be surprised about a lack of fear until after Oct opex.

Everyone Looks for The Retest

There’s a psychological hack called “anchoring bias” that is often reflected in the market.

For example when a stock rallies to 97, odds are it will run to $100 because it’s a whole number and people anchor off it.

The collective psychology of the market starts looking for a retest of the lows.

When too many people focus on a level, one of two things happen:

  1. It doesn’t get hit
  2. We really overshoot

Right now we’re in scenario 1. If we get a short squeeze into Oct opex and then earnings suck, we could end up in scenario 2.

Carl Icahn Gets Drafted, Becomes Captain Obvious

Uncle Carl dropped fire onto the internet, with a 15 minute video explaining what everyone already knows.

Yes, high yield debt has been running hot

Yes, corporate buybacks are running hot -- except for AAPL, which is trading at a 9x multiple.

(Guess who’s long AAPL.)

This is all reminiscent of back in 2011 when Tony Robbins put out a “warning video” explaining how a trusted source (probably PTJ) talked about how things could get really, really ugly.

And yeah, it could be different this time. But all the risks outlayed in the video are pretty freaking obvious, now it comes down to whether there’s enough liquidity for those stuck in these positions to unwind their trades.

What Now?

Now it comes to brass tacks. Instead of talking about what has happened, what about the “hard right edge?”

First, time for a very poor joke.

A man walks into a bar, and sees an options trader.

The option trader nursing a beer, scrolling through his phone and pretending to ignore CNBC on the TV at the back of the bar.

The man asks the option trader “How are you doing in the markets?”

The option trader says “ask me at options expiration.

That was the joke. Sorry.

For my trades and the trade alerts at IWO Premium, we’ve done pretty good.

Into the crash, I was smoked on some income trades and put sales but the reversion into September options expiration turned these trades to small losses and profits.

In fact, all my put spread sales were profitable because of my stock selection and scaling techniques.

Simply put, if you’re going to trade options in this market, trade structure and position size matter much, much more compared to where your entry or stops are.

Seriously, What Now?

As for the market here’s what I think…

We’re probably going to rally into Oct opex. We got enough people that rebought hedges, and we’re seeing a momentum divergence already in the markets and some individual stocks.

  1. Iron condors on SPX and RUT can work here provided you size right.
  2. Buying Dec puts in VXX has a high odds of working.
  3. Trading the range by selling spreads against high beta names like AAPL, AMZN, FB, and GS has been working and will continue to work.
  4. Buying Dec calls in USO has a high odds of working.
  5. Buying Nov calls in oversold “fallen angels” in tech is a good trade. Stuff like FIT, PYPL, BABA, FSLR, and GPRO.
  6. If the markets retest recent lows again, they won’t hold and momentum will pick up again.
  7. SPX 2000 can come faster than you think. At the time of this writing we’re at 1930 so we’re 70 points away from that. We’d need to rally 3.6% to get to 2000… if you look at past vol and what the current risk premiums are, it’s very, very possible.
  8. The first run into 1980-2000 is an aggressive fade, but if SPX holds 1950 then don’t fade the next move and look for 2050.

If you want specific trade alerts and you want to join a community of amazing option traders, subscribe to IWO Premium.

I Was Long Into The Market Crash – Here’s What Happened Next

Last month, the market pulled back.

How's that for an understatement!

A 10% downside move is pretty normal for the stock market, but to have it happen in a week was crazy!

I'll be the first to admit I didn't see the crash coming.

Sure, there were signs of a pullback:

  • The Fed day was aggressively faded
  • Market breadth had been weak all year
  • Stock buybacks by companies were running really hot
  • High Yield debt has been flashing warning signs

I had been a little cautious... but I was still long stocks into the crash...

... but I still came out profitable on my swing trades.

How did I manage to do it? Keep reading to find the 3 things that saved my portfolio.

Limiting Risk

Instead of being long stock and panicking on the Monday Crash, I was using an option strategy called credit spreads.


These spreads limit risk in a trade, so even if the stocks I played went to zero I would only be out a specific amount of money. Limiting your risk using spreads can give you an extra psychological buffer if the market sees a strong move against you.

The other major advantage with credit spreads is that you don't need the market to be in your favor the whole time, because it is a high odds position that also makes money over time. Even if I got the direction wrong, as long as it wasn't a consistently downtrending market I would be OK.

Stock Selection

As I said earlier, market breadth had been very weak.


Smallcaps had been deteriorating, commodity stocks were already in mature bear markets... it was ugly even before the market crash.

The only thing really working was high beta tech and healthcare stocks.

Using a series of proprietary screeners and real-world experience, I made sure I was in stocks that bounced aggressively after the crash.


Finally, my main advantage into profiting during a market crash was in my execution strategy.

See, many option traders put on a trade and hope for the best into options expiration.

Trading using a "set and forget" method.

In my experience, that's the worst way to trade options, especially with credit spreads.

Jack Schwager, author of Market Wizards, recently said two important at an investment conference:

Position sizing is as important as entry price


How you implement the trade is as important as the idea you're trading

I believe that two traders can have the exact same opinion on a stock, yet one can be profitable while the other loses.

Adding position size and scaling techniques to your execution plan will give you a massive edge over others who are looking at the same trade setup as you.

In fact, with credit spreads you are able to enter and exit the same trade many times, increasing your profits without increasing your risk.

Sounds pretty good, right?

My execution strategy allowed me to be long AAPL, FB, DIS, AMGN and GS into the market crash and still end up profitable on all the trades.

How You Can Do It Too

This past month, I held a training with some clients about how to trade credit spreads using my unique style of scaling and executions.

Here's what we covered:

  • Defining and constructing credit spreads
  • Risk and reward in credit spreads
  • Major tradoffs with this option strategy
  • Psychological drawbacks and a solution to overcome them
  • A "tranche" framework for credit spread trading
  • How to trade credit spreads in a bear market

We also went into the 6 Trading Setups I Use:

  1. Rolling Returns
  2. PB2MA
  3. PB2BO
  4. Parabolics
  5. EPS 2nd Move
  6. 3rd Std Dev LL

You have the unique opportunity to access this training.

The market looks like it's going to be volatile for a while now... while many become fearful with this kind of price action, I view it as a profitable opportunity.

If you'd like to learn how to trade credit spreads the right way, you can access the training for a limited time.

The total investment in the course is a one time payment of $99.

Act Now, because once we gather enough client feedback, we will upgrade the course and double the price.

To lock in the current price and receive all course upgrades at no additional cost, simply click the button below, enter your payment information.

Once you do that, we will email you with your username and password to access the course.


As with all of my courses, this comes with a Risk-Free Guarantee. If, after 60 days, you find that it wasn't for you... just get in touch with me and I'll refund the full cost of the course.

With my setups the total investment of the course can be covered many times over on just a single trade. Don't miss out on this opportunity to add a new set of profitable trading setups to your arsenal.

Can Iron Condors Work In A High Volatility Environment?

The markets crashed and we're feeling plenty of aftershocks. A 1% gap overnight is not only possible, but happens all the time.

30 handles in the S&P? All we need is someone from the Fed to open their mouth and we'll see that in 30 minutes.

With all the volatility in the market, it seems like putting on iron condors or other income trades would be a terrible idea.

But there are simple tweaks you can make to get the best reward for the risk you take.

The Big Risk in Iron Condors


Iron condors do great in every kind of environment except one:

Trending Volatility.

This means a strong move without little reversion. This can come with a one-directional rally like we had in 2013, or in a market crash like we had recently.

If you can manage your risk against trending volatility, then you will be a consistently profitable iron condor trader.

Well, what if the risk for trending volatility is really high?

What if the market sees another waterfall collapse off the back of Chinese currency intervention?

Or perhaps, what if there is a whisper of central bank intervention that causes a massive short squeeze?

It's Already A Little Priced In

Odds are if you are aware of the risk, so is everyone else.

And the options market responds to these new risks. Here is a chart of the VIX post-crash:


When fear is very high in the markets, the risk premium in options also rises.

Iron condors profit from the decay in this premium, and if the premium adjusts higher for new perceived risk you are able to capture more premium in your iron condor.

On top of that, the premiums expand on further out of the money options-- this is related to tail risk and option skew.

With higher premiums available, you are able to select option strikes that are further out of the money to trade.

This all makes sense-- the tradeoff with higher risk in the market is the potential for higher rewards *or* higher odds as you can pick up options further away from price.

What simple tweak can we use to reduce the headaches in our iron condor trading?

Size Matters

Unlike what most people think, iron condors are not a "set and forget" strategy. It's a dynamic trading strategy and you can get an extra edge through scaling and appropriate use of position size.

Let's take the iron condor posted above as an example.

It's the Nov 1710/1720 2050/2060 Iron Condor.


The big risk here is if SPX sees a big selloff or a massive rally.

But since this is a high volatility environment, I went half size on the iron condor.

If SPX moves big to the downside, I'll roll the put side lower and double the size.

And if we see a big move higher, I'll roll the call side higher and double the size.

By having a pre-planned add to the trade, I'm able to adjust my odds as the market moves without a significant reduction in my potential reward.

If you'd like to see how I trade Iron Condors, I've created a training course that gives you everything you need to become consistent with this option trading strategy. Simply click the button below to enroll in the course.