We sold a lot of September options a couple of weeks ago. And I’d like to do more. But when I stress test positions, they don’t look that good. For instance, some out-of-the-money puts are trading at half the stress-test value.
As a result, we’ve bought back most of our short options, and are looking to close out more before tomorrow’s employment report. We’re not doing any new selling for the moment, even with VIX above 30.
For anyone interested in staying current on correlation in the market, we have several interactive charts showing both actual correlation and implied correlation at www.donfishback.com/blogcharts.
This is a chart of our ODDS 1-month Implied Correlation Index (OICI1M – blue line) and our ODDS 1-year Implied Correlation Index (OICI1Y -Â red line).
You know that volatility is high. But what does that mean for the market and the options market going forward. In this video, I discuss some unique ways of measuring the high level of volatility, and what that means for the short-term and the long-term. I would prefer that you to watch the 17-minute video, but if you don’t have time, here are the key points:
Implied volatility of short-term index options is higher than the implied volatility of long-term options.
This “backwardation has been going on for a few weeks. That’s a long time, but not the record. The record was set during the depths of the financial crisis.
After big increases in volatility, the market continues to make larger than normal moves. Volatility remains high
Although stock volatility remains high, the implied volatility is so high that buying straddles is not a viable strategy.
Eventually volatility peaks, after which there is an extended period where short volatility strategies, such as covered calls, short puts and credit spreads, are appropriate.
