Options Trading at Rock-Bottom Volatility Levels

06/11/2014 8:00 am EST

Focus: OPTIONS

With volatility at record-low levels, Andrew Giovinazzi of OptionPit.com offers a few trade ideas for the current environment.

At least for now VIX hit rock bottom on Friday. There are several components to the volatility complex and VIX is just one of them. As far as the volatility futures are concerned they did break lower Monday for a while. VXX, which is made up of volatility futures, touched below $30 to record a new low for the year.

All of this is in the nature of volatility since it is hard for it to stay at one level for any long period of time because of the changing movement landscape. The problem we have now is the hangover of the last two recent meltdowns. Since there were back-to-back messes in 2008 and 2011 of near-structural collapses (leverage and the euro) newer entrants are convinced of the next one. The VIX at a low is enticing.

There are rational fears for US government obligations growing hugely but revenues are growing with them now. That leaves us with an 11.35 VIX as I write this and 10-day volatility in the SPX of 4.2%. If the good news is blocked by the potential bad news the market tends to go sideways and that pushes down realized volatility, which is where we find ourselves now.

chart
Charts by www.Livevolpro.com
Click to Enlarge

chart
Charts by www.Livevolpro.com
Click to Enlarge

The idea is that it is ok to be long but don't sell too much premium doing it.

The Trade
Keep thinking about time spreads when possible. At these levels OTM call time spreads in the VXX should work with slight bullish index (SPY) time spreads of short duration. The VXX should hedge the index time spreads. Try for a flat or better term structure in the months you choose.

By Andrew Giovinazzi, Chief Options Strategist, OptionPit.com

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