This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Week of March 4 Volatility Review

TheStreet Premium Services

A complimentary preview
of Options-Profits Previews

The CBOE Volatility Index (VIX) itself is still historically low. If we consider the long-term mean of the VIX is about 20, and the mode is closer to 18%, a VIX around 16% is not that high. A 16 VIX would be perfectly priced if the market moved at about 1% a day, up or down. Interestingly, this is almost EXACTLY what the SPX has moved over the last 10 trading days. When the VIX caved in to below 13 I thought we were in the clear through Valentine's Day, and I was shocked how correct I was. Since the middle of February market volatility has been noticeably higher, and overall insurance buying has ticked up.

Do I think this means the market is going to crash? Probably not. Despite the rally in VIX and the bad news out of Italy on Monday, the major indices ended UP on the week and got within a hair of breaking all-time Dow levels. I think the buying of premium probably stems from fear of European headlines, and people are actually hedging as we hit this top.

Another interesting thing I am noticing is the 'vol of vol.' While VIX has stayed low, its swings from 13 up to 19 and then back to 15 which has caused a major spike in the volatility of the index. Over the last 10 days, the HV of the VIX has been close to 220% on an annualized basis. This means that VVIX, which is the volatility of VIX options, trading at 88% is probably too cheap. Yes, the futures do not move as much as the cash, but their vol has been above 100%.

Let's look at changes in actual movement. Go to VOLX.US and look at a number called RVOV, which is the 21-day HV of HV (on a daily basis how much has 21-day historical volatility been changing). The RVOV itself is actually close to 200%.

So what does all this mean to us traders? As Jared stated, it is SO tempting to sell premium on these spikes, things like VIX futures, VIX calls, long puts or VXX. This is not necessarily the best move. IV indexes seem to be fairly priced relative to market movement. I don't think a heavy long OR short actually makes sense right now.

The key may be to look at the IV of IV for answers. Those that have the time to be actively trading, we can do something similar in options by day trading the vega of the options. Basically, we can buy straddles when vol sells off, and then sell them back on these pops. Because IV is swinging around so much we may be in out of positions several times a day. This is very similar to what options traders have been doing in Apple (AAPL) for several months. Vol day trading is not easy and one has to have a firm understanding of how to trade Vega, but that may be the trade that has the most edge.

In an environment where swapping vols back and forth is a good idea, being consistently long or short vega is not a great idea. Until I get a feel for how IV is going to move (my guess is it will settle back down), I am going to be trading much flatter than normal and only executing specific VIX trades that have the limited risk.

Have a good trading week.

OptionsProfits can be followed on Twitter at twitter.com/OptionsProfits

Mark can be followed on Twitter at twitter.com/OptionPit

EXCLUSIVE OFFER: Jim Cramer's Protégé, Dave Peltier, only buys Stocks Under $10 that he thinks could potentially double. See what he's trading today with a 14-day FREE pass.



Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV

Partners Compare Online Brokers

Top Rated Stocks Top Rated Funds Top Rated ETFs