Government Shutdown Watch: Volatility Shifts, Market Impact, and Trade Ideas
Government Shutdown Watch: Volatility Shifts, Market Impact, and Trade Ideas
Government Shutdown Stats
Below, we outline the past government shutdown, its purpose, and what happened to the market one week after the government "came back online."
Probability markets currently price in another 2 weeks at least. There is a 40% probability that the shutdown will last at least until the last week of October.
Uncertainty around the shutdown has caused the implied volatility to increase slightly while the historical volatility has continued to decrease. So forward-looking volatility has risen slightly, while the current market hasn't moved as much.
What Has High IV Ranks
Gold Miners (GDX) and Metals & Mining (XME) ETFs currently have high Implied Volatility (IV) and IV Rank, both of which are important metrics.
Higher IV means a greater expected price movement. For example, all else equal, a stock with an IV of 50 is expected to move twice as much as one with an IV of 25.
IV Rank measures where the current IV sits between its highest and lowest levels over the past year. For instance, an IV Rank of 90% means the current IV is 90% of the way between its yearly low and high. This indicates that options are priced higher now compared to most of the year, so traders can collect more premium for the same options than they could during periods of lower IV.
Both metrics are important.
What Has High IV Ranks
Gold Miners (GDX) and Metals & Mining (XME) ETFs currently have high Implied Volatility (IV) and IV Rank, both of which are important metrics.
Higher IV means a greater expected price movement. For example, all else equal, a stock with an IV of 50 is expected to move twice as much as one with an IV of 25.
IV Rank measures where the current IV sits between its highest and lowest levels over the past year. For instance, an IV Rank of 90% means the current IV is 90% of the way between its yearly low and high. This indicates that options are priced higher now compared to most of the year, so traders can collect more premium for the same options than they could during periods of lower IV.
Both metrics are important.
View of Volatility
We compare the big ETFs and provide some interesting themes.
Big changes in IV over the past three months in GDXJ, GDX, SMH, KRE, and XME.
Lower volatility is expected in XLP, TLT, LQD, FXE, and IEF.
Two Trade Ideas
OKLO ($135.89) Broken Wing Butterfly (OCT) $0.40 Credit
Uranium stocks have been on the move as the next potential "government portfolio" takeover - CCJ, OKLO, SMR, UUUU are some of the more liquid of the group. Volatility has exploded, with upside calls trading at a significant premium to downside puts. If you are looking to play the call skew with no risk to the downside, a wide short duration broken wing butterfly long the 135 call, short 2x the 145 calls, and long the 165 wing trades at a small credit with a 20pt range to hit on the upside.
DAL ($56.79) Short Put (NOV) $1.95 Credit
The first big name stocks to report earnings are coming on Thursday this week before the market opens, DAL and PEP. Delta has been trading rangebound for a couple months now between 50-60, if you think that might continue - with a vol crush after earnings - a short 52.5 put out in NOV trades at just under $2 for just a couple hundred dollars in buying power.
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