Wednesday, September 1, 2010

Volatility Spankin'

Due to the recent victory of the bulls in defending the 1040 level coupled with this morning's flurry of bullish activity, volatility is tumbling down from its lofty levels. Since highlighting the somewhat extreme vol levels that had arisen in last Wednesday's Fading Away post, we've seen a notable decline in the VIX to the tune of 16%. Over the same time frame, we've also seen the VXX down around 12%. This obviously bodes well for those who took last week's volatility surge as an opportunity to enter short volatility strategies. The suggested 1x3 SPY put ratio spread has not surprisingly fared quite well in this environment. In addition to the declining volatility, we've also experienced a week of time decay and a mildly bullish move in the SPY - a trifecta of positive events accelerating our profit accumulation. The current status of the spread is displayed below:

[Source: MachTrader]

The spread was originally sold for a $.95 credit and can now be exited around a $.15 debit. This particular play is not unique in its performance this week. The majority of short volatility strategies I consider when vol is high would have delivered this go around.

For related content, readers can check out:
Entering the Volatility Fray
Exiting the Volatility Fray
Ratios, Ratios, and more Ratios

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