Testimonials
Windows Embedded CE 6.0 download del prodotto chiave Parajumpers Gobi Nobis online nobispjsjackets.ca canada goose sverige Office 2013 Product Key Oracle exams canada goose limited edition ovo

May 29, 2014

Implied Volatility is a Big Factor for Bull Put Spreads

Even though implied volatility has been relatively low in the market, there will be a day when it does rise again. Implied volatility (IV) by definition is the estimated future volatility of a stock’s price. More often than not, IV increases during a bearish market and decreases during a bullish market. The reasoning behind this comes from the belief that a bearish market is more risky than a bullish market. The jury is still out on whether this current bullish market can continue through the summer but regardless, now may be a good time to review a strategy that can take advantage of higher implied volatility even if it doesn’t happen this week. Option traders need to be prepared for all types of trading environments.

Reasoning and Dimensions

Selling bull put spreads during a period of high implied volatility can be a wise strategy, as options are more “expensive” and an option trader will receive a higher premium than if he or she sold the bull put spread during a time of low or average implied volatility. In addition, if the implied volatility decreases over the life of the spread, the spread’s premium will also decrease based on the option vega of the spread. Option vega measures the option’s sensitivity to changes in the volatility of the underlying asset. The implied volatility may decrease if the market or the underlying moves higher.

Outlook and the VIX

Let’s take a look at an example of selling a bull put spread during a time of high implied volatility. In this make-believe environment, the CBOE Market Volatility Index (VIX) has recently moved from 12 percent to about 18 percent in about two weeks which was accompanied by a decline in the market over that same time period. The VIX measures the implied volatility of S&P 500 index options and it typically represents the market’s expectation of stock market volatility. Usually when the VIX rises, so does the implied volatility of options. Despite the drop, let’s say a trader is fairly bullish on XYZ stock. With the option premiums increased because of the implied volatility increasing, a trader decides to sell a bull put spread on XYZ, which is trading around $53 in this example.

Selling the Spread

To sell a bull put spread, the trader might sell one put option contract at the 52.5 strike and buy one at the 50 strike. The short 52.5 put has a price of 1.90, in this example, and the 50 strike is at 0.90. The net premium received is 1.00 (1.90 – 0.90) which is the maximum profit potential. Maximum profit would be achieved if XYZ closed above $52.50 at expiration. The most the trader can lose is 1.50 (2.50 – 1.00) which is the difference between the strike prices minus the credit received. The bull put spread would break even if the stock is at $51.50 ($52.50 – $1.00) at expiration. In other words, XYZ can fall $0.50 and the spread would still be at its maximum profit potential at expiration. If the VIX was still at 12 percent like it had been previously, the implied volatility of these options could be lower and the trader might only be able to sell the spread for 0.90 versus 1.00 when it was at 18%. Subsequently the max loss would be 0.10 higher too. In addition, if the IV decreases before expiration, the spread will also decrease based on the option vega which could decrease the spread’s premium faster than if the IV stayed the same or if it rose.

Final Thoughts

When examining possible option plays and implied volatility is at a level higher than normal, traders may be drawn to credit spreads like the bull put spread. The advantage of a correctly implemented bull put spread is that it can profit from either a neutral or bullish move in the stock and selling premium that is higher than normal.

John Kmiecik

Senior Options Instructor

Market Taker Mentoring

June 13, 2013

Moving Averages, Volatility and the Man of Steel

We’ve identified a recurring pattern in the market that could end up being one of the best market predictors yet.

Take a look at a daily candle chart of the S&P 500 (or the SPY ETF) for the past 12 months overlaid with the 50-day moving average. As you can see, the index has been in a solid up trend for the past year. There were six pullbacks during just the last six months alone where the SPY pulled back down to the 50-day moving average and bounced higher to continue its assent. It has been a tried and true support line.

But as far as support lines go, moving averages are pretty weak in representing actual trade information—compared to a horizontal support line at a specific price. A horizontal support line shows where the buy orders have been in the past for value investors. For example, if a stock dipped down to $50 a share several times in the past, then rose back up, it shows that that level ($50 a share) is where the demand pressure is—value investors bought the stock at $50 which forced the price back higher.

But, moving average support lines are merely psychological. Because the line is not at a constant price, it doesn’t represent a price where demand occurs. Traders only buy it there because it is a moving average. It’s essentially a self-fulfilling prophecy.

In the case of the market today, one of two things can happen technically over the next few days. 1) Support at the 50-day moving average will hold once again and the SPY will continue higher, or 2) Support at the 50-day moving average will not hold and the SPY will continue lower.

But if the SPY ends up closing below the 50-day moving average, we could see a free fall similar to the eight-percent drop we saw in October of last year when the 50-day moving average did not hold.

This potential drop is compounded by the fact that we’re seeing the implied volatility of the S&P 500, or the VIX, illustrating investors’ jitters. The VIX above 18 says the market is scared. Even the Man of Steel himself (Ben Bernanke of course) won’t be able to keep the market up as he has thus far this year if the levy breaks.

So, we need to sit and wait. I think any move resulting in a close below the 50-day moving average warrants strong selling. But a bounce higher from here probably means more of the same. Up, up and away!

Dan Passarelli

CEO

Market Taker Mentoring

May 30, 2013

Waiting for a Top: Is There a Bear Market Coming?

Filed under: Options Education — Tags: , , , , , , — Dan Passarelli @ 12:57 pm

It’s been a good run this year so far. The market is up over 17 percent as I write this post. Many traders would say that market conditions are not fundamentally much different than they were on January 1. But the market apparently is not aware of that fact. Most of the professional traders I’ve talked to are looking for a market pullback, if not a bonifide retracement.

But, do you know what these same bear market seeking traders are not doing? They are not getting short. That’s right. These smart money traders who believe the market is too high and should come down won’t touch a put with a 10-foot pole. Why? There is no bear market technical set up.

In order to properly craft a downside option trade, the bear market set up has to be there. Right now, we have an SPX chart that has no resistance to speak of. There are no lower lows. There are no signs of being strongly over extended with any indicator. There are no bear market patterns. Technically, there is no reason to sell.

Of course, that is not to say these traders are buying however. They are trading very cautiously, as if they are planning which block to remove from an already rickety Jenga tower.

This, I believe, is one of the reasons why we’re seeing such weird VIX trading lately. Typically VIX and SPX move in opposite directions. Or at least, 87 percent of the time they do, historically. But not lately. We’ve seen plenty of times over the past few weeks where as the market rises, so does the VIX. Why? I think it’s because when the market rises, the smart money doesn’t step in and put their money down on stocks. They instead buy limited-risk calls and keep the bulk of their cash in a protected money market account. One could look at a call as a hedge. Traders can hedge against missing out on a rally, while keeping most of their cash safe by buying a call instead of buying stock.

So, when is it time to get short? When will there be a REAL bear market? We’ll have to wait for the technicals to give us something to trade. IF, and when, that happens, it could be a doozie.

Dan Passarelli

CEO

Market Taker Mentoring

April 4, 2013

Historical and Implied Volatility

Dan mentioned recently in a blog that VIX (CBOE Implied Volatility Index) was hovering around a six year low. With the market seemingly on the edge lately due to global events like North Korea and Cyprus, it is important for option traders to understand one of the most important steps when learning to trade options; analyzing implied volatility and historical volatility. This is the way option traders can gain edge in their trades. But analyzing implied volatility and historical volatility is often an overlooked process making some trades losers from the start.

Implied Volatility and Historical Volatility
Historical volatility (HV) is the volatility experienced by the underlying stock, stated in terms of annualized standard deviation as a percentage of the stock price. Historical volatility is helpful in comparing the volatility of a stock with another stock or to the stock itself over a period of time. For example, a stock that has a 20 historical volatility is less volatile than a stock with a 25 historical volatility. Additionally, a stock with a historical volatility of 35 now is more volatile than it was when its historical volatility was, say, 20.

In contrast to historical volatility, which looks at actual stock prices in the past, implied volatility (IV) looks forward. Implied volatility is often interpreted as the market’s expectation for the future volatility of a stock. Implied volatility can be derived from the price of an option. Specifically, implied volatility is the expected future volatility of the stock that is implied by the price of the stock’s options. For example, the market (collectively) expects a stock that has a 20implied volatility to be less volatile than a stock with a 30 implied volatility. The implied volatility of an asset can also be compared with what it was in the past. If a stock has an implied volatility of 40 compared with a 20 implied volatility, say, a month ago, the market now considers the stock to be more volatile.

Analyzing Volatility
Implied volatility and historical volatility is analyzed by using a volatility chart. A volatility chart tracks the implied volatility and historical volatility over time in graphical form. It is a helpful guide that makes it easy to compare implied volatility and historical volatility. But, often volatility charts are misinterpreted by new or less experienced option traders.

Volatility chart practitioners need to perform three separate analyses. First, they need to compare current implied volatility with current historical volatility. This helps the trader understand how volatility is being priced into options in comparison with the stock’s volatility. If the two are disparate, an opportunity might exist to buy or sell volatility (i.e., options) at a “good” price. In general, if implied volatility is higher than historical volatility it gives some indication that option prices may be high. If implied volatility is below historical volatility, this may mean option prices are discounted.

But that is not where the story ends. Traders must also compare implied volatility now with implied volatility in the past. This helps traders understand whether implied volatility is high or low in relative terms. If implied volatility is higher than typical, it may be expensive, making it a good a sale; if it is below its normal level it may be a good buy.

Finally, traders need to complete their analysis by comparing historical volatility at this time with what historical volatility was in the recent past. The historical volatility chart can indicate whether current stock volatility is more or less than it typically is. If current historical volatility is higher than it was typically in the past, the stock is now more volatile than normal.

If current implied volatility doesn’t justify the higher-than-normal historical volatility, the trader can capitalize on the disparity known as the skew by buying options priced too cheaply.

Conversely, if historical volatility has fallen below what has been typical in the past, traders need to look at implied volatility to see if an opportunity to sell exists. If implied volatility is high compared with historical volatility, it could be a sell signal.

The Art and Science of Implied Volatility and Historical Volatility
Analyzing implied volatility and historical volatility on volatility charts is both an art and a science. The basics are shown here. But there are lots of ways implied volatility and historical volatility can interact. Each volatility scenario is different. Understanding both implied volatility and historical volatility combined with a little experience helps traders use volatility to their advantage and gain edge on each trade which is precisely what every trader needs!

John Kmiecik

Senior Options Instructor

Market Taker Mentoring

March 14, 2013

Six-Year Low in the VIX? What’s It Mean to YOUR Options Trading?

The VIX, or CBOE’s Implied Volatility Index, hit a six-year low this week. What’s that mean to options trading? Lots!

Options trading is greatly affected by implied volatility. At its most basic level, when the VIX is low, it tends to mean lousy options trading.

Option traders are not incented to trade when the VIX is low. Traders generally don’t want to sell options when premiums are so low. There is no reward and still there is always the specter of the risk of an unexpected market shock. And, option traders don’t want to buy options either. Why? Because when the VIX is low, the VIX low is for a reason: Because market volatility is low. Why would traders want to buy options (and endure time decay) is the market isn’t moving?

And so, as always, the devil is in the details. Right now, there actually exists a somewhat atypical pattern in many stock options. Many stocks have their implied volatility trading decidedly below historical volatility levels. Though this volatility set up can be seen here and there at any given time, it is more common than usual. That means cheap volatility trades (i.e., underpriced options) are more abundant.

Stocks like CRM, C, GE, F, and even the almighty AAPL all have implied volatility below their historical volatility.

That means that even though overall stock volatility (as measured by historical volatility) is low, the options are priced at an even lower level. That means time decay is very cheap per the level of price action in these stocks. And, implied volatility in these stocks (and probably the VIX as well) is likely to rise to catch up to historical volatility levels—assuming the current price action continues as it is.

So, traders should be careful not to sell too many option spreads (i.e., credit spreads) at these fire-sale levels. Instead, traders should look to positive vega spreads (i.e., debit spreads), at least until implied volatility rises offering worthy premiums to option sellers.

Dan Passarelli

CEO

Market Taker Mentoring