Just a couple days before markets got jittery in October, my Dad asked me to find him some "cheap" upside calls in the VIX.
The only problem was that he requested something longer-dated, and before we were able to identify the right month and strike, it was already too late. I still credit him with a nice “call” though (pun intended), as his sixth sense regarding an upcoming market selloff proved spot on.
October 2018 was certainly a bit of a strange month. After expecting volatility to hit the markets for so long (and being wrong), I had almost given up hope at the start of the month. My outlook was that we would continue to rally into 2019 (that could still happen, by the way)
On the surface, the trade war and rising yields appear to be the catalysts for the most recent correction. Equity markets in China have gotten slaughtered this year, and it doesn’t seem that surprising that chaos in the world’s second-biggest economy finally bled over to the first-biggest. Alongside those developments has been the ongoing narrative in crude oil, which rallied in Fall due to an upcoming boycott of Iranian oil (i.e. an anticipated decline in available supplies).
Obviously, the steep selloff in equity markets affected the VIX, which finally broke out, and pushed well ahead of its historical average. After trading so long in low-teens (or below), the VIX climbed all the way to the mid-20s in early October.
Obviously, no one knows exactly where we go from here. There are an abundance of important market catalysts approaching - earnings in October/November, midterm elections in November, and the aforementioned boycott of Iranian oil - all of which make forecasting the future even more difficult.
Considering all of that, one big positive is that there should be plenty of great opportunities to trade in the coming weeks and months - no matter your strategic approach, or outlook.
On Options Jive, the hosts highlight how the S&P 500 components have diverged somewhat in their direction during 2018. While it may feel like most stocks are up on the year, that is definitely not the case. The graphic below highlights this fact quite clearly:
The above tells us that whether you like to get long or short directionally in stocks, there are plenty of opportunities on both sides - especially for contrarians.
Likewise, the hosts of Options Jive provide a snapshot of Implied Volatility Rank (IVR) in some of the S&P 500's biggest winners and losers so far this year. Meaning that if you prefer to trade long and short premium, you’ll find an abundance of opportunities as well.
If you do like trading volatility from both sides, the aforementioned episode of Market Measures may help you optimize your thinking and market approach.
The focus of this show is fresh research produced by tastytrade that uses a study to highlight the fact that "pairs trading” using volatility has historically produced the most attractive results when spreads between implied volatility in SPY and QQQ are at their widest. The team also points out that the spread between those two is currently at the wider end of the historical range.
To keep abreast of important market developments through the remainder of 2018, we also recommend following tastytrade's live programming throughout the trading day.
If you have any questions, or just want to send us your thoughts on the markets, don't hesitate to reach out to @tastytrade on Twitter or email@example.com.
Thanks for reading!
Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.