Market is all over the place at the moment after gapping down big, it has bounced a bit off the 1050 level on the ES. Internals are still fairly weak. Cumulative ticks were down right off the bat and now are back up positive and kind of oscillating indicating it's probably going to be a mixed day. Apparently the "locals" (floor traders) were short in the S&P futures pit and were forced to cover as "paper" (brokers acting for clients) started to buy - (You can listen to this audio feed from Trader's Audio or as a free service from the market cast chat room in TOS delivered by the always great Ben Lichtenstein).
As for my trades, I exited GOOG today for $1.57. Reasons were that I didn't like the big volatility today and the fact that GOOG has bounced nicely off 459. Also and more importantly it doesn't take much for a $460 stock to move $10 in a day. Current implied volatility levels give an expected move (1std deviation) of $9. Therefore you want to take profits when you can especially when most of the money made in the trade was due to falling implied volatility levels after earnings. As for the GS trade, that is working out nicely as the stock has recovered from the early weakness. Therefore I'm likely just to hold onto this and see how it works out.
At this point in time, I feel like it's prudent to trade smaller as the market seems a bit uncertain here and we could be in for some more volatility. Only trades I like here are longer term high prob iron condors 55 plus days out where I can get very wide break evens.
Awesome Michael high prob iron condors I agree.
ReplyDeleteWhat about double calendars also if Vol is historically low for year?
dP
Hi David,
ReplyDeleteThe problem with calendars at the moment (and something that Mark Sebastian explains very well in past posts on his blog) is the differences between the behaviour of front month and back month movements in implied volatilities (front month tends to show a greater sensitivity to market movements compared to back month - concept of weighted vega). To compound the situation current option volatilities on the SPX are in contango (longer term option volatility is priced higher than the short term). Thus with all of these effects combined, a big move will cause the front month option implied vols to move more than the back month option vols (which cannot be modeled by your options analysis software properly - this volatility risk has always been a limitation of using option risk graphs to trade as it needs to assume a fixed volatility to produce it). Thus if you've sold an option that increases in implied volatility than the back month one you've bought then you will have lost money not to mention the fact that the rapid movement takes you outside of your profit zone.
Long explanation for a short question but I hope that all made sense!
Excellent summary. Yes, it's hard to trade what you cannot see... I wasn't aware. Cheers
ReplyDeleteAnd is Mark Sebastian now www.optionpit.com , over from option911?
ReplyDeleteYes he is.
ReplyDelete