Where Is the Volatility?

07/25/2014 8:00 am EST

Focus: OPTIONS

Andrew Giovinazzi of OptionPit.com takes a look back at the bizarre feeling he had about volatility on an otherwise relatively calm mid-week trading day.

Wednesday kind of reminded me of the anticipation before walking on a trading floor some mornings.  Something was going to happen but you just didn’t know what.  The first instinct was to raise the bid in the options a little bit and do some price discovery.  The corporate earnings news and economic data has been pretty good lately so the heeby geebies were not from there.

The there was in the Ukraine and Gaza and that was setting a sad backdrop for a mostly rosy market picture Wednesday.  The rule I learned early is the market hates uncertainty and there seemed to be something behind door number 1 or number 2 but no one really knew what it was.

chart
3D Skew by OptionVision
Click to Enlarge

Note where the skew was catching a bid Wednesday and that it was mostly on the upside. 
The SDEX—which measures downside skew is down on the day as the ATM options—were catching a bid and the downside volatility was fading.  This feels a bit like price discovery to me and it is on the run not the drop.  The upside is lurking as it has so many times this year when traders least expect it.  That’s the feeling right now, if we can get past the issues on the other side of the Atlantic.

The Trade

Use the bid in upside skew for Upside Broken Wing Butterflies in the indexes for credits two weeks out.  Set them for max benefit on a $200 SPY.  If the geopolitical stuff gets ugly, keep the credit.

By Andrew Giovinazzi, Chief Options Strategist, OptionPit.com

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