Condors and Volatilities

From Daily Options Report by Adam Warner discusses whether the price action is in line with volatility expectations.  Note also his trading strategy mentioned at the end.

Jared at Condor Options provides a Volatility Tracker of all sorts of instruments each week. Yesterday, he noted this.

This week’s report is a little late, but after the close Monday I see little reason to change any of the comments below. The Dow Jones Industrials closed down 187 points, but that’s not so remarkable when you consider that, on Friday, the Dow volatility index (VXD) implied a standard deviation of daily moves of 140 points.

I popped a similar observation on twitter yesterday in regards to the SPX.

Basically, we have gotten so used to lack of stock volatility that a rather unexceptional drop like yesterday almost felt like a crash. But implied volatility levels already assume moves of this magnitude should be more common.

You can take any volatility level and covert it to (sort of) an expected range for the underlying. Just divide it by the Square Root of 252 (the number of trading days per year). That number equals 15.86. So divide the VIX, now in the low 30’s, by that and you see an expectation of a 2% move per day or so.

Except that’s not exactly what it says. Actually, it says that 68% of days should see a move of under 2%, and 32% should see greater than 2%. So by that metric, yesterday’s move down in SPX was pretty………normal. If we start seeing that every day though, clearly options volatility will perk up. But the larger point remains that Implied volatility already prices in a little pickup in the fluctuations.

If I had to lay out a scenario here, it’s that we see a brief bout of volatility this week before resuming out inexorable march towards inaction again after Expiration. I am going to use this week to sell July volatility (probably puts) while defending it with some leveraged ETF’s.