After several of the indexes were up almost a full standard deviation mid-day, the markets have turned around this afternoon. Based on the look and feel of the turnaround would not be shocked if we ended up in the red and the IV indexes ended up somewhat very green.

I bought more of the RUT 670 straddles, this time for 15.60. Heck if I liked it at 16.00 I loved it for 15.60. Here is the chart:

RUT Straddle

Popularity: 29%

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It has been exactly one year since the markets bottomed out after the disaster of 2008. Since March 9th, 2009 the SPX is up over 70%, the NDX 81% and the RUT is up almost 97%. In that time as many of you know the volatility indexes have been completely crushed. The VIX, VXN, and RVX are all down around 65%. The 3 years since about the summer of 2007 have been very turbulent. The SPX went from all time highs unbelievable lows and part of the way back.

The Pink is the SPX, the RUT is the Blue

This is a great lesson in risk management. Many traders understand and know they can ‘win the war.’ Meaning, in the end most traders opinions end up being right at some point. What ends up killing many traders are the battles in that war. The market does not follow a given path and does not need to move one direction or another. Often the markets will defy logic for an extended period of time. The key is not to let these battles in the markets (i.e. the NDX up 10 days in a row). From the day the market began to rally one year ago today, person after person was telling me that the market can’t keep going up. My response over and over and over again was…..YES IT CAN (you’d think I love the President wouldn’t you).

As far as the market go right now the ATM straddles are relatively cheap compared the put and call skew. Call skew is somewhat sharp (I think this has to do with covered shorts) and put skew is even sharper (this has to do with covered longs). In order to get a feel for skew, I like to compare the ATM IV to the underlying’s volatility index. For instance, right now the VIX is at 17.90, the SPX April 1140 ATM IV is 15.80. Thus, the spread is a 2.10. I have seen this spread get close to 1 when implied vols are high; I have also seen this go well over 4. While 2.10 on its surface isn’t high, we have to remember that the VIX is near its 1 year low, thus 2.10/17.90 become a much larger number in relative terms. Thus, if I was going to get short premium today (and I am not sure I would) I would want to sell wing IV and buy ATM IV. Some sort of ratio spread might make sense.

I am looking to possibly buy more RUT straddles (I liked them at 16, I should LOVE them at 15.50, right?)

Popularity: 42%

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