Pavlov and the Three Little Bears
24 minutes ago
Reflections of an Options Trader
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.
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.