There has been a good deal of talk in option and other trading circles lately about how high realized volatility is, even though implied volatility has begun to taper off. Which one is “right?”
The 20-day Historical Volatility of the $VIX futures (middle row of the table below) is now exceedingly low. This will not last, and one can expect some sharp movements in the ensuing weeks, but the timing of such a move is not clear. There have been articles on Bloomberg and elsewhere in the past week, discussing how speculators (which they classify as “smart money” – although I’m not sure how they’d know that, except possibly for the size of the trades) have been loading up on on the $VIX March (18th) 23 and 24 strikes calls. The articles claim that market makers would be extremely short volatility at that level and could accelerate a volatility push to the upside should the March futures trade that high.
We have addressed this subject a few times in the past, but with the equity-only put-call ratios plunging to multi-year lows, it seems appropriate to take a fresh look and review what we know from the past. As noted in the market commentary above, the standard ratio is down to levels last seen in November 2021. The weighted ratio is at a new low for this year, which is about as low as it ever gets.
This is one of our best seasonal trades, but it doesn’t occur every year. Simply stated, if there is a selloff in the broad market of at least 3.2% at any time during October, then the end of the month presents a strong buying opportunity: Buy on October 27th (if that’s a weekend, as it is this year, then buy on the preceding Friday – which would be today, October 25th). Sell on Nov 2nd (if that’s a weekend, as it is this year, then sell at the close on the following Monday – which would be November 4th this year)...
This title “Sell at September expiration” refers to the older days, when options only expired once per month – on the third Friday. Now, options expire every day, but the seasonal trading system is to short the market (or buy puts) at the close of trading today – September 20th, the third Friday – and cover a week later. That would mean exiting the position at the close of trading on September 27th this year.
We all know there are risks to 0DTE trading – mostly the swift time decay, changing delta and gamma, and potentially violent price moves by the underlying. But serious option traders are not deterred by those things; they can avoid most of them by merely paying attention. It then becomes a matter of how much time do you want to devote to a daily trading strategy. But this week, I read about a different kind of risk – one that I was not aware of, but which is apparently very real. To give credit where it’s due, the following article is based on this article by Cabot Wealth.
Back in 2014, we published an article entitled “Sell In May and Go Away...or don’t.” At this time, we’re going to update the data in that article and discuss what it means. It was in the double issue, TOS Volume 23, Nos. 9 & 10, published on May 23, 2014.
We have had a proprietary volatility premium indicator in place for some time. Now, we are going to begin to use it in a trading system that we have developed.
There is a developing divergence between Cumulative Volume Breadth (CVB) and $SPX. That is, $SPX is making new all-time highs, but CVB is not. CVB is merely the running daily total of “advancing volume minus declining volume.”
