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Risk On – Risk Off
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Risk On – Risk Off

by The MoleAugust 21, 2019

Volatility is a tough beast to tame, despite the general consensus among finance geeks and quant traders that it’s a lot easier to predict than signed returns. GARCH is your friend but it gives us an unsigned return – a range of 20 handles means that the market could as easily run up 20 as it could drop by 20. So what do we do?

We look at implied volatility, which is calculated as well but the difference is that it’s based on the pricing of live option contracts. Meaning as opposed to looking back we are effectively looking forward in terms of market expectation.

If an option has a 20% implied volatility then that doesn’t mean some evil market maker said so – this would be akin to putting the cart before the horse. It’s trading at 20% because supply and demand say so.

What inspired this post is that I got a bit annoyed last evening when I was trying to buy some in-and-out call spreads in the Sep20 Spiders  in order to take advantage of a possible jump higher post Fed announcements or at least take advantage of realized volatility (i.e. wild swings).

I could go into details about I/O spread but that would exceed the context and probably bore you to tears. Just take it from me that asking for a $1.86 debit for a $2 spread I/O call spread isn’t even near what I’d be prepared to pay for it  – $1.05 marks the maximum debit I’m willing to spring in that context.

If you’re not an option trader than the underlying culprit may not be immediately apparent. Look no further than – you may have guessed it though – the implied volatility column, which has me at 46.8%/58.21% for the bull call spread and 15.68%/16.72% on an equivalent bear put spread.

On a relative basis that’s a delta of 11.4% on the call side and only 1.04% on the put side. Suffice to say that I’m not paying a 11.4% premium in IV just to see it crushed later this week.

One thing I really love about ThinkOrSwim is that it offers you the thinkBack tool, allowing you to look at EOD option pricing back in history – or as we old white dudes often refer to as ‘the good ole’ days’.

The contract chain above is taken at EOS on 4/16/2019 – last April – and like the current September contract it is 31 days out. Now compare the IV in the respective put and call columns. FWIW – implied volatility in the call column is actually a bit elevated as it’s usually quite a few percentage points lower than in the put column.

What does it all mean?

It’s not rocket surgery really. In order for the market to price puts at such a steep discount the market is pricing a massive premium on a move to the upside. Which means that this is where most institutional market participants believe we are going.

But but – Mole – didn’t you tell us we are things are looking bearish on a MT to LT basis just last week?

Yes – yes, I did.

Problem is a) I could be wrong and/or b) that we are looking at significant upside risk in the interim. Take your pick because I don’t know either.

What I am seeing on my charts is a massive jump in implied volatility which thus far has been unable to breach < the VIX 16 mark. And if you’re a bit nerdy like me then you will have no problem finding a ton of research papers that clearly show us that a jump in IV usually begets more IV – especially if there’s a significant change in standard deviation.

Be this as it may – IF you’re holding a boat load of shorts right here today. then you may want to consider vega and delta hedging yourself a little bit. You have been warned.

Based on the Friday contract the market is pricing in a 68% chance of a 36.5 handle move in the SPX futures by Friday EOS. True to form price is in the process of settling near its 100-day SMA and leaving the door open for a myriad of scenarios.

Whatever you do – don’t attempt to buy naked calls as a drop in IV would effectively crush your vega and thus diminish your options premiums even though you may be right in terms of direction. I hate to say it but in the current condition the only way to win is not to play.

Better luck next week.


About The Author
The Mole
Mole created Evil Speculator amidst the chaos of the financial crisis in early August of 2008. His vision for Evil Speculator is a refuge of reason, hands-on trading knowledge, and inspiration for traders of all ages and stripes. You can follow him and his nefarious schemes at the usual social media waterholes.
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  • Ronebadger

    “It’s not rocket surgery” … (I gotta remember that.) It’s like MY favorite expression: “You’ve buttered your own bread…now you have to lie in it.”

  • HD

    ladies and gentlemen, the 2929 pivot.

  • https://evilspeculator.com Sir Mole III

    Hehe

  • http://www.captainboom.com/ captainboom

    I’ve been selling OTM puts and capturing the time decay and IV collapse for a few weeks now. Not making a ton of money, but I don’t have the time to baby sit my positions right now, so picking up a few pennies here and there.

  • ridingwaves

    JWN 30’s options are interesting before earnings this pm….Going long

  • http://gerb-reloaded.blogspot.com Gold_Gerb

    now *that’s* a post.

    Best to stay out of this Gordian knot of volatility, unless you are confident.

    https://www.theguardian.com/us-news/2018/sep/17/squirrels-tail-vets-untangle-knot-rodents-wisconsin

  • http://iberianviews.blogspot.com/ catracho

    Some neg divergences setting up on 2 hour and higher time frame charts watching – if it breaks down – could be a “jump on the train move” – waiting

  • mSquare

    Like throwing money away! They are no WMT or TGT!

    Better compare is Macy’s ($M) – it is down 31% in 1month with more than half of it after their earnings on Aug 14 and still making new lows since!

  • http://iberianviews.blogspot.com/ catracho

    The rally fromrecent lows looks messier and less convincing than previous rallies off the lows in Dec 18 and Jun 19

    https://uploads.disquscdn.com/images/9f448f3654ad808894902599f5b828a61f3fb1bea600c0e9b1a54227c076870d.png

  • HD

    there’s zero volume between 2900 and 2929 it’s all BOTs. shaking everyone out for the next move.

  • ridingwaves

    They are 200% different than macy’s, no one shops at those ghost stores….Macys is ross stores with a older name….Nordstroms is where the people with money shop…

  • http://www.quemango.com Herb InCebu

    Excellent update… Maybe we do hit 2960 area but this is the more important insight: “in the current condition the only way to win is not to play.”

    What do you make of gold? Gold and bonds seem strong and cannot catch a meaningful correction so it seems risk off under the cover.

  • mSquare

    Compare the stocks – more similar there for sure.

  • https://evilspeculator.com Sir Mole III

    Agree on gold – holding pretty steady there.

  • https://evilspeculator.com Sir Mole III

    That’s what we call ‘picking up pennies in front of a steam roller’. Works great for a long time until one day you suddenly get wiped out. I recommend a -1 +3 -1 modded bear backspread instead. Strike price selection:

    SELL X 1 -.18 to -.22 delta put

    BUY X 3 -.22 to -.27 delta put

    SELL X 1 -.35 to -.40 delta put

    Go out about 90 days and sell the whole contraption before the 30 day mark.

  • Julie 35 – 25 – 36

    UNG Out of remaining 1/4 long 18.92 stop. Yes Chief as discussed previously a rise in volatility can lead to more volatility as determined by the study by two Nobel Laureates Thanks Chief
    JULIE

  • HD

    $1T deficit by 2020. SPX >2900

  • Julie 35 – 25 – 36

    Hi HD I won’t bring up a chart but SPX has a double bottom off the 233 ema daily chart or the weekly chart 55 ema. Since August 13 the gap ups have stalled after the 1 st hour. A trading range exists approx 2950 – 2825.The daily 55 ema or 50 sma is declining and price is basically below both.The old axiom “If they can’t take you out then they will wear you out” is prevalent presently .SPX needs a bullish breakout above approx 2950 and it’s 55 ema for a continuation of a bullish campaign All the analysis in the world is moot until a direction is determined by a substantial breakout or a breakdown below 2825 My two cents
    JULIE

  • ridingwaves

    I think that most miss that nordstroms rack and their online are very healthy business’s compared to macys which is horrible…plus they had a $50 buyout offer by owners to take private last year….that has not left the building… but this is what makes a market…

  • Rightside

    or Misbehavior of Markets, Maestro Mandelbrot

  • Julie 35 – 25 – 36

    Hi Rightside Do you trade oil? USO It’s a short below 11.57 it’s 5 ema and Ichi Cloud conversion line (8) Overbought failing at an upper downtrend line and lower cloud boundary.There is money to be made trading individual stocks and commodities in lieu of the indices. VEEV is setting up for a long above 162.25
    JULIE https://uploads.disquscdn.com/images/313be6b4776afeb17ea287bc8f9793f897b9a2e631e411f1446ded790011ef14.png

  • ridingwaves

    Its 23 trillion….whats a couple cents between friends…
    got gold, did get some pretty year of the pig Perth mint coins last night…..so shiny….

  • Julie 35 – 25 – 36
  • RoastBeeph

    Beautiful eyes!

  • Rightside

    Yes, thanks for that.
    Also looks like OVX could end two week downtrend and still be above 30 , a level it hasn’t been able to stay below

  • Julie 35 – 25 – 36

    Good Man Rightside very few people use OVX the oil volatility Index. I too follow OVX and in the past shown OVX charts. Thumbs up Rightside
    JULIE

  • Julie 35 – 25 – 36

    FYI There is a VIX for Gold $GVZ
    JULIE

  • Julie 35 – 25 – 36

    FED minutes anytime now Too much … !
    JULIE

  • Julie 35 – 25 – 36

    $BKX An inside day hovering at it’s 5 ema … Uncertainty
    JULIE

  • BKXtoZERO

    Nice set up. Target 0

  • http://www.quemango.com Herb InCebu

    Right, be like a cat ready to pounce. Only trouble is the thing moves Gap-n-Go. Sure does not feel like it’s going to rip higher here.

  • BKXtoZERO

    L more TVIX day only 16.27

  • Julie 35 – 25 – 36

    Hi BK Super important presently the Banks. Zero is coming lol
    JULIE

  • http://gerb-reloaded.blogspot.com Gold_Gerb
  • Julie 35 – 25 – 36

    Hi GG $BPSPX and $NYSI going above it’s 10 sma will confirm SPX breakout above 2950
    JULIE

  • http://gerb-reloaded.blogspot.com Gold_Gerb
  • ridingwaves

    funny how fed minutes debunk the next fed funds cut……..the puppet masters are sure twisting there strings…

  • Julie 35 – 25 – 36

    Guys Remember the rails are the last sector to fail in a business and or economic cycle If you dare bring up a chart $DJUSRR … UGLY !
    JULIE

  • http://gerb-reloaded.blogspot.com Gold_Gerb
  • http://gerb-reloaded.blogspot.com Gold_Gerb

    I see no significance attributes to distinguish that and SPX.
    =P
    https://stockcharts.com/h-sc/ui?s=%24DJUSRR&p=D&yr=5&mn=0&dy=0&id=p20271184348

  • Julie 35 – 25 – 36

    GG You are a blind Gerbil lol
    JULIE

  • ridingwaves

    thanks for correction…..the pig always win, since it’s year of the pig and she is a lady…..
    https://www.youtube.com/watch?v=CsbYx6hevoQ

  • http://gerb-reloaded.blogspot.com Gold_Gerb

    after looking at your charts?
    You Bet

  • Julie 35 – 25 – 36

    LOL ! GG Checkout $TSX The trading range last 4 months. $TSX heavily weighted commodities
    JULIE

  • http://gerb-reloaded.blogspot.com Gold_Gerb

    oh come now, the Canadians? that’s desperate.
    😉

  • http://gerb-reloaded.blogspot.com Gold_Gerb
  • Julie 35 – 25 – 36

    $CRB and $TSX Deflation on the horizon is a very real threat GG
    JULIE

  • http://gerb-reloaded.blogspot.com Gold_Gerb

    no. you’re right. it is. I posted a long video over the weekend.
    it’s in there.

  • http://gerb-reloaded.blogspot.com Gold_Gerb

    a CRB crisis could coincide with a TLT peak, as I shared with BK last night. https://uploads.disquscdn.com/images/a98d9b1e1f1af2560a26b7307e53280ab7897236be3f051a802e47ea0a912c12.jpg

  • http://gerb-reloaded.blogspot.com Gold_Gerb

    “They will throw their silver into the streets, and their gold will be treated as a thing unclean. Their silver and gold will not be able to deliver them in the day of the LORD’s wrath.”

    -good thing I bought bitcoin.
    😉

  • Julie 35 – 25 – 36

    GG The FED has messed up as usual.Yeah they raised rates BUT by how much.? Sure Now we lower rates BUT there is not the wiggle room per previous increases.historically.The Great Experiment is gonna fail GG and could get very ugly. Negative rates you gotta be kidding me ! Who in their right mind is going to have a savings account where we pay the banks.They are completely crazy GG
    JULIE

  • http://gerb-reloaded.blogspot.com Gold_Gerb

    Yes, they are crazy, or they are trapped. Doesn’t matter.

    Before something new can take place, the old has to be torn down.
    Let’s not forget they are running systems that are very behind the modern world.

  • Darkthirty

    https://www.zerohedge.com/news/2019-08-21/here-short-gamma-reason-behind-todays-market-meltup Can anyone decipher this article? Appears that the VIX drives the market?

  • Julie 35 – 25 – 36

    Yes GG Our Chief has pointed out too just like we have been warning A RESET is going to occur. Another interesting fact 80% of Americans over the age of 21 can’t even come up with a $1000 bucks.If one family member lose their job during a recession it going to get very ugly GG
    JULIE

  • http://gerb-reloaded.blogspot.com Gold_Gerb

    Dare I say: the middle class shrinking as they are, have become street smart now. They know the ruling class and their ways. The ruling class is at war with the rest.

  • Mark Shinnick

    Article notwithstanding, Fear and Greed drive the market.

  • http://gerb-reloaded.blogspot.com Gold_Gerb

    Time Check.

  • Julie 35 – 25 – 36

    GG The Bible The first shall be last and the last shall be first. Also it’s easier to thread a camel thru the eye of a needle than for a rich man to enter the Lord’s Kingdom.BUT a rich man who believes in Jesus as our Savior and lives by the Bible’s tenants will inherit the Lord’s Kingdom An excellent sermon several months ago
    JULIE

  • http://www.quemango.com Herb InCebu

    Market Meltup is more like toilet overflow. At leased they observed the flush two weeks ago. 😐

  • http://gerb-reloaded.blogspot.com Gold_Gerb

    don’t get too preachy! we’ll be banned!

    I do like the gate theory:
    The “Eye of the Needle” has been claimed to be a gate in Jerusalem, which opened after the main gate was closed at night. A camel could only pass through this smaller gate if it was stooped and had its baggage removed. This story has been put forth since at least the 15th century, and possibly as far back as the 9th century. However, there is no widely accepted evidence for the existence of such a gate.[7][8]

  • http://www.quemango.com Herb InCebu

    And sometimes the PPT!

  • Mark Shinnick

    Isn’t in a slo-crush mode?

  • BKXtoZERO

    Out with tiny ding.16.27 to 16.10 tvix

  • Darkthirty

    Fed banks and bots drive the market. Some banks were forced to take bailout $ they didn’t want.

  • ridingwaves

    BAMMM

  • ridingwaves

    some banks were allowed to become conduits for more evil lending….
    GMAC = ALLY
    JPM getting WM for nothing….

    it was and still is the biggest heist of personal wealth in the history of mankind…

    Don’t forget GS was allowed to become a bank overnight to save it…..from IB to bank in lickety split, thanks Paulson

  • Darkthirty

    Which is why they were all forced to sign. WHAT they signed is the question. Everyone present must stab the victim, so they’re all complicit…

  • ridingwaves
  • ridingwaves

    get out of jail card

    sign here

    I am God Blankfein

  • mSquare

    Its a casino! Well played. Was a big short interest too

    disclaimer: After getting whupped by Macy’s – ‘how can it go any lower with all the real-estate and an 8%+ yield’ trade I am shy of these violent movers and just cashing out and aim to stand aside …By the way it now yield 9.8% and for now keeping the dividend…

  • Darkthirty

    And PPT is AKA ?

  • ridingwaves

    good to be lucky, I’m out 3/4, might buy back in tomorrow on short rescue attack….

  • Darkthirty

    Symmetry says 2976. 786 retrace says 2976.

  • http://www.captainboom.com/ captainboom

    Thanks for the idea. I’ll take a look.
    I’m fully aware that I could get assigned the shares. I have the cash to buy them, and won’t mind owning the companies I’m selling the puts in.

  • http://gerb-reloaded.blogspot.com Gold_Gerb
  • http://gerb-reloaded.blogspot.com Gold_Gerb

    9.8% interest is a way of warning you.
    “you might not get a dividend in the near future” ..or your initial capital.
    😉

  • http://gerb-reloaded.blogspot.com Gold_Gerb
  • http://gerb-reloaded.blogspot.com Gold_Gerb

    Lower volume. Ha!

  • http://gerb-reloaded.blogspot.com Gold_Gerb
  • mSquare

    I hear you and was aware of ‘abnormally high’ dividend and the risk it portrays.

    I had hedged into these earnings, even heavier than my usual, so counting all the options and next dividend I am not off 30%+ but still -ve and holding.

  • Ronebadger
  • BKXtoZERO

    interesting….. My guitar amp goes to 11 too.

  • https://evilspeculator.com Sir Mole III

    Gamma risk is considerable as an option contract approaches expiration. It seems a lot of institutionals were short gamma, which also means they were short delta in the VIX. Reason being that the option smile is extremely steep at this point and firms are selling vol further out and buying vol nearby. Problem however is if we see a short term drop in the VIX (and the futures) which in again means they start hedging in the SPX futures.

    It’s complicated as hell and really difficult to explain the whole picture. But in essence, the VIX drives nothing. It’s the options that drive this market – since 2016 and the introduction of additional weekly contracts in the SPX futures we are looking at extremely high efficiency in the markets. For some reason however we are also seeing more volatility over the past two years, so if you know what you are doing you can make fortunes by playing on expected move.

  • https://evilspeculator.com Sir Mole III

    @Darkthirty:disqus

    Gamma risk is considerable as an option contract approaches expiration. It seems a lot of institutionals were short gamma, which also means they were short delta in the VIX. Reason being that the option smile is extremely steep at this point and firms are selling vol further out and buying vol nearby. Problem however is if we see a short term drop in the VIX (and the futures) which in again means they start hedging in the SPX futures.

    It’s complicated as hell and really difficult to explain the whole picture. But in essence, the VIX drives nothing. It’s the options that drive this market – since 2016 and the introduction of additional weekly contracts in the SPX futures we are looking at extremely high efficiency in the markets. For some reason however we are also seeing more volatility over the past two years, so if you know what you are doing you can make fortunes by playing on expected move.

    https://uploads.disquscdn.com/images/bdb5d79bbe27a2f9036fd99ecb66cdf0581ec1903257d56fef00dfd5017425e0.png

  • Ronebadger
  • pepe

    What books or other sources do you recommend for a further read on this subject?

  • ridingwaves

    FYI- GC and SI 27th is comex opex…..

  • Mark Shinnick

    30.6-8 nearterm objective?

  • HD

    “But in essence, the VIX drives nothing. ”

    This should remain the featured comment indefinitely.

  • http://gerb-reloaded.blogspot.com Gold_Gerb

    SPX minutely, gap close.

  • HD

    1T$ budget deficit, like every year. Not the national debt.

  • ridingwaves

    it might drive higher next week, I’m betting on it….Additional tariffs to start 9-1, me thinks a sell off is coming….that is all I know…

  • ridingwaves

    all the ingredients are there to hit gold bugs, opex after jackson hole….got popcorn

  • ridingwaves

    33.95, 37 if they run shorts hard, 20 short ratio…

  • http://gerb-reloaded.blogspot.com Gold_Gerb

    35 pt moves. I’m going to throw-up.

  • BKXtoZERO

    VIX drives me,… drives me insane :/

  • Darkthirty

    Missing too many points?

  • HD

    HWB

  • BKXtoZERO

    almost back to vwap too

  • Julie 35 – 25 – 36

    Guys SPX Just follow price action (advancing or declining) SPY volume (increasing or decreasing) and open interest (increasing or decreasing).About a year and a half ago BK showed a chart with these and stated “How easy is this ” Congrats to BK he knows. Don’t make it harder than it is and keep it simple
    JULIE

  • BKXtoZERO
  • BKXtoZERO

    LOL…

  • Julie 35 – 25 – 36

    I remember BK You did Bro .. It’s all you have to do . I showed a summary in a reply to you.Your on it BK … We know !
    JULIE

  • Julie 35 – 25 – 36

    Anyone shorting oil ? I did this a.m when USO 10 min chart a bearish close below 11.59
    JULIE

  • http://gerb-reloaded.blogspot.com Gold_Gerb
  • Mark Shinnick

    This is a very unusual inflection, broad-marketwise. Its a time of exceptionally large latent vol potential within the present vol slo-crush. Not many will quite understand and have the modeling tools developed to statistically see this setup, but the indecision patterns to be seen all over the place give a heads-up.

  • Julie 35 – 25 – 36

    GG I just discovered a day trading mechanism … sure fire ! lol!
    JULIE

  • Julie 35 – 25 – 36

    Covering USO short for B/E Gotta run
    JULIE

  • http://gerb-reloaded.blogspot.com Gold_Gerb
  • BKXtoZERO

    Up or down swammee?

  • BKXtoZERO

    Jimmy Hoffa

  • ridingwaves

    my bet is we test lows of last week, next week….but I’m just a surfing fisherman…

  • BKXtoZERO

    BTW… Mole…LOL on Karate kid theme. Risk on…risk off

  • http://gerb-reloaded.blogspot.com Gold_Gerb

    about an hour to go.
    looks like it was stop runs both sides of the hourly MA.
    https://uploads.disquscdn.com/images/ef2ab022c5768a45194aa77cfd4090d42a5c3177cdaf8f0895c77aa26dfb5e79.png

  • http://gerb-reloaded.blogspot.com Gold_Gerb
  • BKXtoZERO

    I would sure like to swan kick those market slobs in the face but they sure do make it hard.

  • http://www.quemango.com Herb InCebu
  • http://gerb-reloaded.blogspot.com Gold_Gerb

    Impossible. They’ve got those
    option Crane/Dragon spreads.
    😉

    http://www.radiopanamericana.com/j/images/galerias/2016-03-14_3-1457995060.jpg

  • http://gerb-reloaded.blogspot.com Gold_Gerb
  • BKXtoZERO

    Out of day position flat tvix….still holding daily size position

  • Darkthirty

    something about a pirate and ” Aye, it’s drivin me nuts”

  • http://gerb-reloaded.blogspot.com Gold_Gerb

    nothing like a solid VIX
    https://uploads.disquscdn.com/images/8a27aacf22a046306829401a03f3af3069f81213d37f9f64370954499501d948.png chart to give you confidence, a smile, and some good wood.

  • http://gerb-reloaded.blogspot.com Gold_Gerb

    The bulls have their range.
    nice little dip, tail today.
    https://uploads.disquscdn.com/images/2ee3d459d70964566cefee511102e0c14dddd3102c56d3d66247ee992ebfc051.jpg
    Above the 10 day ema.

  • http://gerb-reloaded.blogspot.com gold_gerb

    Love the steak, don’t stay for the sizzle.

    3 weeks ago was the last kiss good-bye, IMHO.
    something’s afoot.
    https://uploads.disquscdn.com/images/92d4c3ab96b7bc026298d119d896904ab27181ae752a381b404761a7f5a4855d.png

  • BKXtoZERO

    nice for some………….

  • Julie 35 – 25 – 36

    GG Did you see where former Bronco’s QB John Elway has Dupuyten.s contracture ?. 16 million people in U.S. afflicted with it. His is in both hands mine only one hand
    JULIE

  • BKXtoZERO