Weekly Option Volatility Report
Each week OPTIONMIZER analyzes markets showing opportunities based on volatility. We delve into the volatility analysis of the markets to find trade designs advantageous to options traders. This report provides specific trading strategies to use in select markets based on the OPTIONMIZER volatility analysis.
S&P 500
5 Month Average Implied Volatility = 31.6
Current Estimated Implied Volatility = 22.0
MARKET AND VOLATILITY ANALYSIS: Improved consumer confidence levels and rising home prices may be the catalyst for the next big move higher today. Maintaining those levels once breached will be the keystone to this week’s trading. Even though some reports are improving, they are coming off near-record lows in some cases. That is hardly going to provide the solid base that is needed after all of the uncertainty and bad news seen in the last twelve months. Some of the more positive wording and focus is starting to feel like smoke and mirrors. Implied volatility levels are off recent highs, but are still floating above statistical levels providing a possible entry point for short option trade strategies.
RECOMMENDATION: Sell short-term call spreads to play a potential failure of prices if economic data lacks real growth or solid recovery evidence.
Swiss Franc
5 Month Average Implied Volatility = 13.5
Current Estimated Implied Volatility = 10.6
MARKET AND VOLATILITY ANALYSIS: Investment uncertainty and a mixed bag of recovery evidence continue to keep a lid on all-out, long-term investor enthusiasm. Markets which have traditionally held court as havens – like the Swiss Franc – have walked a fine line in drawing investor interest this time around. Trading nearly sideways over the last few months, the Swiss Franc may be set to move one way or another. Implied volatility levels have tapered off significantly and are well below the five month average, nearly the same as statistical volatility levels.
RECOMMENDATION: Buy strangles amid lower levels of implied volatility to try to establish a directionally neutral trade as the economic future still appears cloudy.
Corn
5 Month Average Implied Volatility = 39.6
Current Estimated Implied Volatility = 37.1
MARKET AND VOLATILITY ANALYSIS: Revised details from the USDA on acreage and yield may have put a dent in prices for corn earlier this month. Good weather will likely bring continued selling pressure on the complex to end the season. Without any headline making fundamental threat to the grains in the US, prices may have to fight to hold onto any gains as crop conditions improved. Implied volatility has moved a little higher, but remains well below statistical and under the five month average. This sets up the potential for long option entry ahead of any possible changes in global grain conditions, particularly in India or South America.
RECOMMENDATION: Buy straight longer-term calls on this lower level of implied volatility to try to play a potential rebound in prices post-harvest.
Live Cattle
5 Month Average Implied Volatility = 17.9
Current Estimated Implied Volatility = 15.4
MARKET AND VOLATILITY ANALYSIS: Livestock prices may have dived earlier this year as demand – or the perception of consumer demand – fell along with some family budgets. Red meat consumption may have been hit hard amid recession, but the drop in livestock inventory numbers may prove more dramatic, as recent price moves higher suggest. Volatility levels have slid lower but with implied holding above statistical. As the market appears to consolidate following the jump in prices on the back of apparently bullish fundamentals, this likely small peak in implied volatility could provide a beneficial entry point for short option plays.
RECOMMENDATION: Sell straight puts to play the higher implied volatility level against possibly bullish fundamentals.
Disclaimer: Transactions in options carry a high degree of risk. Purchasers and sellers of options should familiarize themselves with the type of option (i.e., put or call) which they contemplate trading and the associated risk. Selling (“writing” or “shorting”) an option generally entails considerably greater risk than purchasing options. Naked options writing involves unlimited risk. Although the premium received by the seller is fixed, the seller may sustain a loss well in excess of that amount. Option buyers should calculate the extent to which the value of the options must increase for a position to become profitable, taking into account the premium paid and all transaction costs. HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEYARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICALTRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
This newsletter has been prepared solely for information purposes, and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or instrument or to participate in any particular trading strategy. The information presented in this site is for general information purposes only. Although every attempt has been made to assure accuracy, we assume no responsibility for data errors or omissions. Examples are provided for illustrative purposes only and should not be construed as investment advice or strategy. The information presented herein has not been designed to meet the rigorous standards set by the Commodity Futures Trading Commission for disclosure statements concerning the risks involved in trading futures or options on futures. That disclosure statement must be provided to you by your broker.
