We're Moving!

As the two year anniversary approaches for my writing ventures here at blogspot, I've decided it's finally time to bust a move.  While blogspot has treated me well, there have always been a few features, or lack thereof, that have curtailed my creativity and hindered my ability to deliver content in the manner I want.  Moving to a more robust web hosting platform will help overcome these nuisances while giving Tyler's Trading more room to grow in the future.

Regarding location, tylerstrading.blogspot.com is simply becoming www.tylerstrading.com.  I've now saved you time by shaving nine characters off my url.

I know.

You're welcome.

The new site is still a work in progress and you will likely see continued changes to come.  I plan to post any new content going forward within the new site versus here at blogspot.For those of you that have links to my site, please change the address to www.tylerstrading.com

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Low Volatility, a Siren Song?

 

With the VIX residing close to its lowest levels in half a year, talk of buying volatility is coming back in vogue.  While the appeal of loading the boat with long volatility strategies is understandable, be aware that this particular temptation may turn out to be a siren song.

In Greek mythology, the Sirens were three dangerous bird-women, portrayed as seductresses who lured nearby sailors with their enchanting music and voices to shipwreck on the rocky coast of their island... The term 'siren song' refers to an appeal that is hard to resist but that, if heeded, will lead to a bad result.

In the world of volatility, traders would be well served to remember that everything is relative.  Though a VIX at 22 seems cheap compared to its recent range, keep in mind the following two things:  First, the historical mean of the VIX resides right around 20 which, at the least, should make traders rethink how cheap 22 really is.  Second, and perhaps more important, the only volatility that truly matters is how much the underlying stock actually realizes throughout the duration of the trade.  And, if current market volatility is any indication as to what the future holds, not only is 22 not cheap, it's arguably expensive.

Suppose we heeded the low volatility call and purchased Oct 113 straddles on the SPY.  At a current implied volatility of 20%, the straddle is pricing in roughly a 1.26% move per day.  For those disinclined to take the percentage route, that comes out to an expected daily move of about $1.42 (roughly 2/3 of the time).  In addition, this also means we should see the occasional move in excess of $1.42 (roughly 1/3 of the time). Unless you've had your head buried in the sand, you should know we have most definitely not experienced that type of movement in recent weeks (see 10 or 21 day historical vol). 

In sum, despite the ostensibly low volatility, straddle buyers still seem to face an uphill battle.  Unless you're of the opinion that either the market movement is poised to increase notably in the coming weeks or we're on the verge of a strong directional move, straddles are not a slam dunk buy here in my humble opinion.

For related content, readers can check out:
The Tempest and Volatility Analysis
Straddles and Gamma Scalping
Gamma Scalping Inquiry

Implied Vol vs. Historical Vol

The Oil Angle

After spotlighting the relationship between precious metals in yesterday's The SLV Lining post, today marks yet another foray into the commodity space in an attempt to draw some meaningful conclusions. Whether it is due to my recent fixation on relative comparison charts or my monthly option plays on the United States Oil Fund (USO), I've noticed oil has been riding the pine for much of the recent bull run.  In Monday's Chart of the Week, Bill Luby of VIX and More cited the broad-based support for the market rally as virtually every  market sector was experiencing notable gains.  The same could be said regarding commodities for that matter.  In addition to the aforementioned silver and gold, we've seen a variety of agricultural commodities climb on board the bull boat as well.

So what's the deal with oil?  Not only is it not on board, it's floundering in the water unable to catch a bid.  Consider the following relative comparison chart (click to enlarge).

[Source:  Livevol Pro]

While USO did a commendable job in tracking the performance of both the SPY and GLD through the month of April, from May forward it seems to have lost its mojo.  Despite the apparent weakness in the underlying commodity, it may be important to note that most energy stocks have fared much better over the same time frame.  Both the Energy Select Sector SPDR Fund (XLE) and Oil Services HOLDRS Trust (OIH) have had much better participation in the recent rally in the equities market.

For related content, readers can check out:

Time to Catch a Falling Knife?

Rolling With Crude Oil

Bare Naked Oil Puts

The SLV Lining

With last Tuesday's breakout to all time highs, gold was thrust back into the spotlight after receiving little attention over recent weeks.  Though gold is usually the primary recipient of media attention within the commodity space, silver has been capturing some significant gains as well.  Indeed, silver, as measured by the ishares silver trust, has tripled the gains of gold over the past month (click image to enlarge).

[Source: Livevol Pro]

To exploit a continued rise in silver, how about this short put, long call spread combo suggested by the IVolatility Trading Digest Blog:

With a Historical Volatility of 18.54 and an Implied Volatility Index Mean of 29.33 for an IV/HV ratio of 1.58 and a very bullish put-call ratio of .24, consider this combination.

 In the event there is a correction in the next few weeks, there is a chance the Oct 20 put will be in-the-money and assigned.  This could be part of a plan to establish a long ETF position. In the event there is no near-term pull back then the October will expire reducing the cost on the outstanding long call spread.  However, if the correction continues back below 19, then consider unwinding.

All in all I like the structure of the play.  I'm a fan of using short puts on cheaper priced stocks particularly when one is seeking to accumulate shares of stock at a discount.  The long call spread goes out a couple months giving traders ample time for the stock to move into the meat of the spread.

For related content, readers can check out:

Stealth Rally

IVolatility Trading Digest Blog

Volatility Comparison Charts

In Livevol's newest round of software updates, they've launched yet another groundbreaking tool for option traders.  While perhaps not as revolutionary as their 3D Skew feature, the new volatility comparison charts still offer some exciting possibilities.  Though there are numerous sources you can go to that offer the ability to compare historical and implied volatility for the same security, I'm not aware of any, save Livevol, who offer the ability to perform relative comparisons on the implied volatility of different securities.  While it's true you could view multiple volatility charts side-by-side or one after the after the other to make relative comparisons, Livevol has taken it a step further allowing users the ability to overlay vol charts from several different securities simultaneously.  Consider the following chart comparing the 30 day implied volatility of RIMM versus the SPY (click image to enlarge).

 [Source:  Livevol Pro]

As I see it, viewing vol charts in this manner gives us the ability to draw quicker, more meaningful conclusions in the area of correlation.   Traders can now easier tackle questions such as...
What effect do broad market volatility trends have on the volatility of individual companies?
What are the similarities or differences between the volatility of different asset classes such as stocks, bonds, and commodities?
When do we see an individual company's volatility move in tandem with the VIX, when does it move to the beat of its own drum? 


In addition to the aforementioned volatility comparison charts, other new features of note include relative price comparison and a custom scanner allowing the ability to build scans specifying your preferred price, volume, fundamental, and volatility characteristics.  When launching Livevol Pro, it was professed "to be the new standard in option trading".  Well, mission accomplished in my book.  It is quickly becoming a one stop shop for option analytics.

For related content, readers can check out:
What Will They Think of Next?
Finding Volatility
GOOG, What Volatility Bid Up?

It's Settled

 Traders owning any type of bullish position going into today's VIX expiration woke up to a pleasant surprise.  Since assessing the volatility landscape in last week's The Impending VIX Expiration post, we've seen a heavy VIX continue drifting lower day by day. However, this morning's pop erased the losses of the past few days lifting the fear index up towards last Thursday's price levels.  We all know (hopefully) that settling VIX options can get a little squirrely.  Though I outlined a fairly systematic method for analyzing volatility, there is a bit of luck involved with getting a favorable settlement value.  Keep in mind however, for as many settlements that move in your favor, you will likely have an equal amount where you get shafted.  Of course, some choose to simply forego all the drama unfolding around settlement by exiting their positions beforehand.

Per the $VRO chart below, September's official settlement value came out to 22.97.  At $1.41 higher than yesterday's close and $.42 higher than this morning's opening print on the VIX, settlement certainly tilted in the favor of the bulls (click to enlarge).

[Source:  MachTrader]

For related content, readers can check out:

Expiration and the Resolution of our VIX adVentures

VIX Expiration and Term Structure

VIX Settlement and Term Structure

Stealth Rally

While the S&P 500 has been riding on the seemingly endless 1130-1040 merry-go-round in recent months, gold has staged a stealth rally.  Since the middle of July, dip buyers largely disenchanted by the seesaw action in equities have been welcomed with open arms by the shiny metal.

[Source:  MachTrader]

As a result of this virtually uninterrupted march higher, historical volatility has tumbled off a cliff to its lowest levels in years (8%).  Not that this is all that revealing, as just about any steady uptrend is accompanied with declining volatility.  At the same time implied vol is reticent to drop below 16% which has acted as a consistent floor over 2010. 

[Source:  Livevol Pro]

In addition to the SPDR Gold Shares shown above, we're also seeing the Market Vectors Gold Miners ETF (GDX) pop to new all time highs.  Suffice it to say, those that have stuck with the gold trade are certainly reaping their rewards.

For related content, readers can check out:

Breaking Down a Put Spread

Time to Shine?

Gaming the Gold Bugs Redux