Index Volatility Pairs Trade

If you have been watching the markets you know the VIX has shot up very fast very quickly in the past few days. The Vix has worked its way up to 18 from a low of around 11. This means many  indices have a high IV_Percentile. I am aware that IV_Percentile is not perfect; however, it is a good indicator of where volatility is compared to its own range. The SPY/SPX vol percentile has reached about 78%. This means volatility is over extended. However, we have had a decent down move in the past few days making a new low for the year. This puts a lot of risk in the water of where volatility might go or where the stock market might go.

This risk on the table allows for a very interesting opportunity. I do not pretend to know where the market will go, and I do not know where volatility will go. However, I do like to trade relationships. Now we have SPX/SPY volatility trading in the the 78th percentile, but we have IWM and QQQ trading in the mid-60's considering percentile. What this is telling me is that small caps and tech stocks are saying that there is much more room for vol expansion than the larger stocks are. In other words, the high volatility stocks that often make the first move are saying that there is room for volatility expansion. The larger markets are not saying this, and the vol percentile is telling me that there is room for volatility is mean revert. These conflicting signals give me an interesting volatility relationship that I could trade. So, I have interest in selling the higher volatility (SPY) and buying the lower volatility (IWM/QQQ).

Chart of RVX (Russell Volatility (IWM)) - VIX (SPX Volatility (IWM)):

 So what I am doing is buying this pair. Now this chart doesn't show all the opportunity because it is not illustrating the high IV_Percentile. If we were to trade this pair there are a couple ways have doing this. The first was is selling an SPY iron condor and buying a IWM double Diagonal. This is a pure volatility trade. I prefer to trade this pair factoring in direction because the markets have fallen very quickly. Considering direction, I am going to want to be long delta in the index I want to sell volatility (vol goes down into up moves), and I want to be short delta in the index I want to be long vol in. Below are some possibilities to do this trade.

1. SPY: Sell a put and IWM: Buy a put
2. SPY: Sell a wide put spread and IWM: Buy a wide put spread (same width of strikes)
3. SPY: Sell a skewed iron condor and IWM: Buy a skewed double diagonal
4. SPY: Sell a put spread and IWM: Buy a short duration directional Diagonal (Long ITM back month and short OTM front month (Puts))

(You will want to skew these trades considering your directional or how strong your volatility bias is.)

More Vol Coming? Probably?

We just had a 25 point down move in the /ES. Implied volatility jumped up to 13 (a level still below the mean), and the markets started looking slightly bearish. A lot of options traders have been caught short the market, due to the low volatility. Therefore, large up moves are not always easy to stand for many professional options traders. I only have one warning. Do not get over excited. The markets are not showing signs of crashing down. However, volatility is slowly rising. As I said before, the markets will go down with everyone least expects it. I only say do not get over excited, but as earnings season is back, there is volatility back on the board. My own personal hope is the VIX slowly creeps up, and causes some panic. We then will see much more interest in the markets. I will leave you with a few interesting stocks. DOW, FB, and TWTR. I have been playing these stocks like crazy with all this high volatility. I have also amassed some pretty large positions. I continue to sell weekly directional premium in these while being short iron condors in the back month (FEB 38 days to expiration). However, it is easy to get too big. The most promising of three right now is TWTR. I would give it until earnings for  great opportunity, and after then the volatility most likely get crushed. I would still like to be able to play TWTR for a while, if possible.

Hints for More Oppurtunity

2013 was a really tough year for traders, specifically strategic traders. The markets did almost nothing but go up, and we had no volatility. We only had a few days where the VIX went above it annual mean in the last year. An environment like that gives us very little opportunity as traders. It was very difficult to take advantage of volatility because it rarely became overextended and direction is hard to deal with all by itself. However, I am starting to see some more opportunity on the board. I have scrolled through many stocks on my platform, and slowly the volatility ticks up more and more. I think we are going to see some volatility expansion very soon, and we will likely see a sell off in the ES. My position has become short delta, but I am still making money almost every day this year. That is weird. However, that might be a reflection on some of the opportunity out their. I am been seeing some very interesting premium crushes. The main stock I am watching is TWTR. It is a relatively new stock so the volatility is pumped. My general game plan is to be short volatility while getting slightly short or long delta considering the move. If TWTR falls a bit I am long some delta (At the current time selling some weekly put spreads), or if TWTR goes up a bit I will be selling call spreads. At the moment, I am short weekly put spreads, short call spreads in the front month, and short an iron condor. This stock will only have such pumped vol for a few more week, so take advantage of the opportunity available. Otherwise, I am short delta, short premium, and long index volatility (Vix is an example). The only really interesting stocks/markets right now are CMCSA, MSFT, and DOW. Sell some premium in these, stay small, but remember there is some new volatility opportunities starting to come in; therefore, be watching and be careful with earnings.