A Low-Volatility Options Play

11/14/2013 8:00 am EST


While the markets have been hitting one all-time high after another, the Vix have been trying to hit new lows, notes Andrew Giovinazzi of OptionPit.com.

As of 3:30 EDT, Tuesday, on the market is flat lining just down about ¼ of a percent and VIX is up .33 with the VIX futures just flat on the day. For the most part, stocks have been leaning on a few things since the last blowout NFP.

  1. The employment picture is going to improve
  2. Janet Yellen will be the next Fed Chairman
  3. Stocks think the taper is reality

If I wrote #3 in June, that was good enough for a 10-point correction in the SPY. For now, we sit at all-time highs trying to figure out where to go. VIX is trading lower mostly because the market is not going anywhere and stocks seem blasé about the Fed action. VIX ultimately reflects realized volatility and that is still in the single digits.

Click to Enlarge

But the term structure is very bid in the VIX futures. The Jan 2014 VIX future is 3.73 bid over cash. That is not cheap and is adjusting for the low VIX. The action really is looking to come at the beginning of the New Year so it feels like we take advantage of that in the short term. Traders would look for a trade to take advantage of the big Jan future premium. I think the volatility futures could be right but there is some serious decay potential in the meantime.

The Trade
An iron condor in the SVXY (leverage short volatility ETF) could work ok. Look for something in the Jan cycle and skew it more toward the downside. The SVXY bleeds slowly up but gaps down when it moves. The future premium should dampen some short term moves. Close before Christmas.

By Andrew Giovinazzi, Chief Options Strategist, OptionPit.com

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