Volatility in the Market Yields Opportunity

Here’s an interesting article about volatility with a discussion of opportunities available as a result.

After two weeks of uncertainty, high volatility and volume equities look as if they have found a short-term bottom. For traders incorporating volatility strategies into their plans there are so many ideas available this week we thought the best description was Opportunities Galore. After a brief strategy comment, we offer eight put sale ideas along with five call spread put combinations, a synthetic long, and a put spread all with a directional bias designed to take advantage of a continued equities advance along with expected declining volatility.


At the close on Friday our day-weighted VIX Futures premium over cash was -22.44%. On Monday of last week when the VIX closed at 48 the discount to cash was -33.11% the highest discount we have recorded to date. Readings above 20% are generally a good indication of increased professional hedging in anticipation of an immediate decline while negative readings suggest complacency about protecting long stock positions by buying VIX futures contracts. Low and especially negative readings such as those seen last week, have been good leading indicators for short-term market advances. After last Monday’s extreme discount the S&P 500 Index (SPX) made a key reversal and appears to be headed higher based upon our indicators, including the skew and kurtosis readings that both reached extremes last Monday.

All of the improvement after Tuesday’s reversal could be unwound if there is more negative news from Europe over the weekend. Our colleague in Europe reminds us Italy is a huge debt problem and since the European banks will need to raise capital, they will tighten lending, especially interbank lending which may create liquidity issues.

As for last week’s volatility in the equity markets, here is an appropriate quote from Samuel Brittan in last Thursdays Financial Times. “The stock exchange always has been and always will be a mixture of investment appraisal and sheer gambling.”

For those who implemented some of our put sale suggestions in previous Digest Issues may be concerned about being assigned stock on the August expiration coming at the end of the week. If we are right about the reversal continuing higher this week the number positions that may be candidates for assignment will most likely diminish and for those who need to buy back short puts implied volatility will most likely continue declining this week.

Opportunities Galore, Part One

Now we turn our attention to selecting a few ideas from the many that are now available. In order to include more ideas we will abbreviate and leave out some of the detail we usually include with the suggestions and present some ideas in tables.

We begin with some near term August put sales. Since they will expire at the end of the week they will quickly lose time value, including over the weekend, so be prepared to see lower quotes on Monday, but from an implied volatility perspective, they should still be high on Monday and then decline with the time value during the week…

Read the entire article here

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