A slow crawl.
That's the best description of this market right now.
And after the on/off macro trading back last quarter, it's a great reprieve. I don't feel obligated to get futures quotes at 2:30 AM anymore.
Is volatility a buy here? Maybe, maybe not. The $VIX at 19.40 is certainly stretched to the downside from where we were a few months ago, but it's still above long term averages.
And on top of that, the realized volatility in this market is at a whopping 8.75.
How things can change over the course of 3 weeks!
Lower volatility, both realized and implied, brings about a completely different set of challenges for options traders.
Today we'll look at what trades you could consider if you are looking to hedge successful gains.
1. Call Conversions
This is one of my favorites, especially if you focus mainly on equities trading.
Many equity traders think the best way to hedge is to buy puts against your stock to protect downside.
But you can get the same risk characteristics by simply purchasing a call
The advantage to this is it frees up a TON of cash that you can deploy in fresh trades. The downside is it lacks the versatility of a protected put strategy.
Want to "start from scratch" in your options trading? Check out my options training course at OptionFu.com
2. Directional Calendars
Calendar spreads (or time spreads) are often though of as a way to generate income through positive theta.
But a component often neglected is its long vega characteristics. So if implied vol goes higher, then you make money.
If you combine that with a bearish delta, you can benefit from direction, vol, and time decay (assuming you're right).
The only problem with this right now is that the term structure isn't great for calendars. This means the implied volatility is higher on mid-term options than near term, so it puts you on lower footing initially.
3. Dispersion Trading
We're going a little further down the rabbit hole.
All this means is that you look to buy volatility on individual equities, while still selling volatility on the indexes.
A great example of this right now is $AAPL. It's current implied volatility is through the floor. Mark at OptionPit has the full rundown.
So what would be a good example of this?
A trader could purchase March straddles (long call and long put) in $AAPL while simultaneously selling iron condors in $NDX. If realized volatility picks up, it will most likely come through faster in $AAPL.
4. Trading VIX Options
When markets go down, the VIX goes up-- most of the time.
The correlation between the VIX and $SPY is about -0.8, so long volatility works well as a hedge.
Problem is, there is no "pure play" for trading the $VIX. You've got derivative ETNs like $VXX and $VXZ, as well as VX futures and options.
Of course, you can learn all about it in my book Timing Volatility.
One of the coolest ideas I saw came from the guys at OptionMonster's Youtube Channel:
Did I miss anything? What do you think is the best strategy in this environment?
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