Implied Volatility (IV) has risen in equities, Gold, Bonds and other markets as the polls in today’s presidential election are very close. Near term expirations have a higher IV than ones a month further out. This is not the normal situation but is what we typically see in an equity heading into earnings. This provides opportunities to us as premium sellers. What are the best opportunities and how much of a drop in IV should we expect? What strategies should we use to take advantage of this expected Volatility crush?
A table of the current underlying Implied Volatilities in the SPY (S&P 500 ETF), GLD (Gold ETF) and TLT (Bond ETF) was displayed. The table included the three closest expirations and their days to expiration (DTE). The table showed the estimated Volatility Crush that would come after this binary event. Two possible trade ideas in the SPY to play for the binary event were displayed. An at-the-money (ATM) Straddle and a 30 Delta Strangle. Both have 3 DTE. The trade ideas included the strikes used, credit received, profit target when managing winners and breakeven prices in the SPY. A P/L graph of the SPY short Straddle showed that with a possible 10% drop in volatility 25% of max profit should be achievable between 210 and 216 in SPY tomorrow. A second P/L graph showed that an SPY short Strangle could reach 50% of max profit should be achievable between $209 and $215 in SPY tomorrow as well.
Two possible trade ideas in the GLD were also outlined. An at-the-money (ATM) Straddle and 30 Delta Strangle. Once again we chose the short term expiration with 3 DTE. The trade ideas included the strikes used, credit received, profit target when managing winners and breakeven prices in GLD. Two P/L graphs of the GLD strategies and a possible 12% drop in Volatility were displayed. These were similar to the graphs of the SPY. The Straddle graph indicated GLD could be between $120 and $124 for our profit target and the Strangle chart indicated the price could be between $120.50 and $124.50. Both ranges are based on the expected Volatility crush.
For more information on the Presidential Elections see:
The Skinny On Options Data Science from June 9, 2016: "Betting on Our Crazy Election"
Options Jive from October 19, 2016: "Election Analysis (1 of 2)"
Options Jive from October 26, 2016: "Election Analysis (2 of 2)"
Watch this segment of Options Jive with Tom Sosnoff and Tony Battista for the key takeaways and an examination of two ways to play the expected Volatility crush in SPY and GLD.
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