but basically, just look for generally uptrending names, and then short some puts into mini dips

My guess is that the mini dip where he sold some puts was at the point marked 1. My guess is that he sold 105 puts. Just to keep the trades concrete, say he started out short 10 July 105 puts. I don’t know and he won’t say.

The “T” on the chart labels the day that ICE fell through the 105 strike like a hot knife through butter. AW was in trouble.

So I ended up covering by turning the put short into a butterfly, going long the 100 strike. That was the mediocre.

Long twice as many 100 puts as he was short 105 sounds good to me. Of course, if this is a butterfly, then he was also short, maybe, the 95 puts. So now our hypothesis is that his position is:

-10 105 P,
+20 100 P and
-10 95 P

And he has turned his profit distribution from this:

To this:

Look at the purple line, since that is where the position is when it is put on. He is working his way to breakeven if ICE keeps falling, but no better than break even. Hence “mediocre”.

Stock kept going lower, so then had my one good idea. Just converted it to long downside gamma by shorting more 105 puts so that I was now short the 105-100 put spread 1:1, and then bought an equal number of 95 puts and a little stock.

So the hypothetical position now looks like:

-20 105 P
+20 100 P
+20 95 P

The position gets to break even at 86. Which is where it closed Friday.

That part worked out well yesterday as the stock imploded. The only thing holding me back was….well, me. I got short and shorter thru 95 and was patient all the way until….the 91’s. Which sounded great at the time, not knowing it would go to the 84’s. By which time I bought more stock and kept the long gamma game going by purchasing some July 85 puts.

Roll it all up and a lot of trouble to pretty much break even, although even sounds good compared to the initial ugliness of my put short. I’m now just long some gamma. For the moment, will probably sell some “wings” (OTM puts and calls) and call it a day.

A good recovery.

So what doesn’t move volatility? An low delta OTM call spread in a VIX product to name one thing.

What actually does? Well, stuff like this, from OptionsMonster last Friday (free sub. required).

If you’ve ever wondered where volatility goes to die, read on.

Two recent trades made bear important lessons on why the VIX is near its lowest levels in nine months.

In the largest of these transactions, 200,000 calls and puts on the iShares Silver ETF were sold, and only 75,000 calls were bought. It followed a similar trade on the SPDR Gold Shares exchange traded fund, where 33,000 options were dumped on the market while only 16,500 were taken back out in the form of purchases.

These kinds of trades set off a chain reaction that helps explain why the VIX has plunged in recent weeks. The volatility index is at its lowest levels since September.

As trades like this become more common, they are bringing volatility down. And as volatility subsides, traders bring in less premium selling out-of-the money options. They respond by selling even more options, which then depresses volatility everywhere. We noticed traders using this tactic with Gap options as well, selling twice as many GPS contracts as they bought. Since then the strategy has also been used on McKesson and Baxter International contracts as well.

I’d replace “strategy” with “order flow” above, as it’s not necessarily the same players buying and selling. But the point is spot on. As more call sellers come in, it sets off a daisy chain of bad news for volatility.

Market makers buy all the calls for sale and now find themselves long gamma. They react by lowering options bids across the boards, and attempting to make back some options decay in the stock via shorting into strength and buying into weakness. On the margins both the lower options volatility and increased liquidity in the stock serve to pressure realized volatility down. Which in turn may translate into even more interest in shorting options ever cheaper.

Rinse and repeat.

Index volatility depends partly on the volatility of the component stocks themselves. So as that decreases, it necessarily decreases index volatility.

And this is indeed much of what we’ve seen. At least until Monday as the VIX has turned up a bit.

He discusses the price action in SP500 over the last two weeks.  There has been a price change that has happened only six times since 1990 and four times something else has happened afterward.  Just from a quick and dirty statistical point of view, if something has happened four times out of six, the error is plus or minus two.  So I think of that “four times” as really “two to six times”.  That changes the strength of the conclusion for me.

Pretty rare occurrence this week, via Dr. Brett.

We had a 10-day closing high on Friday in the S&P 500 Index (SPY) followed by a 10-day closing low on Monday. It turns out that this is an unusual reversal. Since 1990 (N = 4895 trading days), there have only been six occasions in which this has occurred.

While six occasions is hardly a sample from which we can build a robust analysis, it’s worth noting that the market was down subsequently on a five and ten day basis on four of the six occasions by averages of -.22% and -.76% respectively.

It also speaks again to the utter lack of volatility in recent days. Really on two levels. You could see low daily volatility, but if it moves in one direction, the net effect is that if you just sat with a short gamma position, you would do poorly as the stock gradually moved away from the strike(s) you are short. So this goes beyond that. Not only did we see small ranges, but they offset each other for a full two weeks.

OK, apparently caused lots of dissenting opinion in regards to slapping on a spread that involved going long VXX and short SPY near term options.

So let me clarify a few points.

This is just a convoluted way around a relatively simple trade, an SPX or SPY calender. So what if we forget VXX and VIX futures exist. The basic thought here is

when volatility caves, I generally would prefer owning calenders. That involves buying longer dated options at likely a higher volatility than I am selling the shorter term options. It gets me short gamma and earns money in the form of time decay.

You have to look at this as two separate transactions though. The short side of the options will earn me money if the realized volatility between now and expiration is less than the volatility I sold them for. Yes, part of that trade likely involves chasing stock into strength and shorting it into weakness. The idea is to lose less doing that than you earn in options attrition.

The long side of the calender is more of a bet on implied volatility at least holding steady. You will not lose all that much time decay, but you are at risk of a move lower in volatility. But if you think options volatility is a buy longer term, you are OK with that.

So combine the two and you are effectively betting on longer term implied volatility to outperform shorter term realized volatility. If you think that’s a good bet, a calendar makes sense.

Using VXX or a VIX future in lieu of a longer dated SPX or SPY option is not identical, but you will win or lose with it in a similar pattern as above.

But it’s important to remember however you chose to go long a longer dated option, it’s not a big deal if you “buy” higher volatility than you sell. It’s two different time frames and two very different bets, there’s no reason they will or should carry the same volatility. A few weeks ago they all did carry about the same volatility. That’s more unusual than not.

So what’s the risk in buying a calendar, or buying VXX and shorting SPY options?

It’s not that some small volatility difference between the two cycles will revert to 0. There are 2 big risks however. One is that realized volatility, which you are effectively shorting, will explode and longer term volatility will not lift as much. You would have got hit massively with that last Fall. Which is why I don’t like this position in a rising volatility environment.

The other risk is that all volatility caves in. Your short volatility will only earn you so much, I mean your options can only go to zero and you will get lousy prices trying to roll them. Meanwhile your VXX or VIX future or longer dated SPY straddle has gotten mauled.

Post getting long here. To be Continued.