THE WEEK AHEAD: VIX, SPY, BMY, XOP, TLT, GLD, TLT, GLD, FXE
Generally speaking, the worst thing to do in a fairly low volatility environment is to put premium selling plays on just to have plays on. My general approach to these volatility lulls is to look at them as an opportunity to work what broken trades you may have on at the moment (e.g., inverted short strangles) in an attempt to dry powder out for the next pulse of volatility upward. It can and will suck, because your theta pile is diminishing on a daily basis, and one of your basic goals over time is to keep that theta number up. Having a high number of occurrences is great, but having a high number of quality occurrences is better than having a high number of low quality occurrences put on in a volatility environment that is less than ideal, since part of your edge with these plays is the notion that implied volatility is statistically overstated over a large number of occurrences and that volatility is mean-reverting and has a tendency to contract from highs.
Last week, VIX finished at 16.1. That's better than it was for a ton of last year, but in the vast arc of time, it's around the imaginary division line between what is considered a high volatility environment and what is considered low. In SPY, 30-day implied volatility is at 15.4%, in the 24th percentile of where it's been over the preceding 52-week period -- in other words, it's at the low end of its 52-week range* when I'd rather have the 30-day high and the percentile high.
The other basic test I use for determining whether broad market premium is worth selling is to look at what a 25 delta 5-wide SPY iron condor is paying in the expiry nearest 45 days.** The April 18th (39 days until expiry) 260/265/282/287 is paying 1.75 as of Friday close, which is greater than one-third the width of the wings, which isn't horrible considering the fact that there's less than 45 days left in that setup. Nevertheless, if I'm going to stick to my ideal premium-selling metrics, I'm going to pass on that play because it could be and has been better and/or richer, and there's always the risk that it'll get caught in a volatility expansion. At the very least, if I do feel compelled to get into that setup, it's going to be for a smaller number of contracts than usual, so that I can keep more capital free to do higher quality plays should we get into a more favorable premium-selling environment in short order.
In the single name area, there is some high premium to be had, but it comes with caveats. For example, BMY (100/44). The implied volatility percentile is where I'd want it, with the 30-day nearly so. The downside is that earnings is in 46, and I'd frankly rather sell premium right around earnings than put something on here, only to have price gyrate around in the mean time and to have volatility potentially expand further running up to the announcement, which is not what you want with these plays.
As usual, though, many traders do violate their standard rules-of-thumb, and I am no exception. Here, I'm doing it with XOP (32/34). The basic reason is that the 30-day is and has been better than broad market volatility for a very long time and is currently more than twice that of SPY; if I'm going to trade kind of an "all weather" setup that I pretty much have on all the time, it's going to be in something that gives me a little more bang for my buck than broad market. That being said, we're kind of in between monthlies where I'd ideally want to put something on -- April's a bit short for duration, May a bit long for my tastes, so I'd probably wait a smidge longer for May to grind down to that 45-52 week until expiry area.
Other Macro Themes:
TLT (20-Year Average Maturity Treasuries): For a short bit of time at the beginning of the month, the underlying collapsed to a low of 118.64 off of near-122 highs, and I thought I was going to get out of my 120 put calendar at my take profit. (See Post Below). No dice ... yet. Toward the end of last week, it looked risk off, with price grinding back up to nearly where it was at the end of February. I shorted it repeatedly from that 122.50 area in 2018 and will dip into that setup again should we continue in this vein, but we're not quite there yet.
GLD: A short from 130 looked possible ... until it didn't, collapsing off of mid-Feb highs back to 122. Back to waiting. Of course, I'll be pissed if it dribble drabbles around here forever when the upward momentum looked so promising there.
FXE (The Euro Proxy): Mario Draghi says the Central Bank's staying "loose" ... for a while. With /6E/FXE breaking out of the box where it's been range-bound for weeks, I'll have to re-evaluate where the extremes lie with 1.185 in /6E being the previous sell area extreme; 1.125, the buy. We're in the bullish assumption/buy neighborhood, but if Mario's going to stay "loose" for the foreseeable future and Powell's going to stick to "data dependent" and leave the pace of further hikes "fuzzy," I'm not keen in taking a bullish assumption shot here yet, since Powell could get all "un-fuzzy" on me at the May or June meetings ... .
/CL: Choppity, choppity chop between 55 and 58 since mid-Feb, finishing on Friday at 56.04.
* -- For exchange-traded funds, I generally look for 30-day at greater than 35%, with the percentile above 50% over the preceding 52-week period. Single name: 30-day greater than 50% and above 70% over the preceding 52-week period.
** -- I've previously looked at what a 20-delta three wide is paying (it should pay at least one-third or a 1.00), but there has been at least one intervening study that shows going tighter with the shorts (25 delta) and wider with the long results in a return on capital that more closely emulates that of short strangles.
Last week, VIX finished at 16.1. That's better than it was for a ton of last year, but in the vast arc of time, it's around the imaginary division line between what is considered a high volatility environment and what is considered low. In SPY, 30-day implied volatility is at 15.4%, in the 24th percentile of where it's been over the preceding 52-week period -- in other words, it's at the low end of its 52-week range* when I'd rather have the 30-day high and the percentile high.
The other basic test I use for determining whether broad market premium is worth selling is to look at what a 25 delta 5-wide SPY iron condor is paying in the expiry nearest 45 days.** The April 18th (39 days until expiry) 260/265/282/287 is paying 1.75 as of Friday close, which is greater than one-third the width of the wings, which isn't horrible considering the fact that there's less than 45 days left in that setup. Nevertheless, if I'm going to stick to my ideal premium-selling metrics, I'm going to pass on that play because it could be and has been better and/or richer, and there's always the risk that it'll get caught in a volatility expansion. At the very least, if I do feel compelled to get into that setup, it's going to be for a smaller number of contracts than usual, so that I can keep more capital free to do higher quality plays should we get into a more favorable premium-selling environment in short order.
In the single name area, there is some high premium to be had, but it comes with caveats. For example, BMY (100/44). The implied volatility percentile is where I'd want it, with the 30-day nearly so. The downside is that earnings is in 46, and I'd frankly rather sell premium right around earnings than put something on here, only to have price gyrate around in the mean time and to have volatility potentially expand further running up to the announcement, which is not what you want with these plays.
As usual, though, many traders do violate their standard rules-of-thumb, and I am no exception. Here, I'm doing it with XOP (32/34). The basic reason is that the 30-day is and has been better than broad market volatility for a very long time and is currently more than twice that of SPY; if I'm going to trade kind of an "all weather" setup that I pretty much have on all the time, it's going to be in something that gives me a little more bang for my buck than broad market. That being said, we're kind of in between monthlies where I'd ideally want to put something on -- April's a bit short for duration, May a bit long for my tastes, so I'd probably wait a smidge longer for May to grind down to that 45-52 week until expiry area.
Other Macro Themes:
TLT (20-Year Average Maturity Treasuries): For a short bit of time at the beginning of the month, the underlying collapsed to a low of 118.64 off of near-122 highs, and I thought I was going to get out of my 120 put calendar at my take profit. (See Post Below). No dice ... yet. Toward the end of last week, it looked risk off, with price grinding back up to nearly where it was at the end of February. I shorted it repeatedly from that 122.50 area in 2018 and will dip into that setup again should we continue in this vein, but we're not quite there yet.
GLD: A short from 130 looked possible ... until it didn't, collapsing off of mid-Feb highs back to 122. Back to waiting. Of course, I'll be pissed if it dribble drabbles around here forever when the upward momentum looked so promising there.
FXE (The Euro Proxy): Mario Draghi says the Central Bank's staying "loose" ... for a while. With /6E/FXE breaking out of the box where it's been range-bound for weeks, I'll have to re-evaluate where the extremes lie with 1.185 in /6E being the previous sell area extreme; 1.125, the buy. We're in the bullish assumption/buy neighborhood, but if Mario's going to stay "loose" for the foreseeable future and Powell's going to stick to "data dependent" and leave the pace of further hikes "fuzzy," I'm not keen in taking a bullish assumption shot here yet, since Powell could get all "un-fuzzy" on me at the May or June meetings ... .
/CL: Choppity, choppity chop between 55 and 58 since mid-Feb, finishing on Friday at 56.04.
* -- For exchange-traded funds, I generally look for 30-day at greater than 35%, with the percentile above 50% over the preceding 52-week period. Single name: 30-day greater than 50% and above 70% over the preceding 52-week period.
** -- I've previously looked at what a 20-delta three wide is paying (it should pay at least one-third or a 1.00), but there has been at least one intervening study that shows going tighter with the shorts (25 delta) and wider with the long results in a return on capital that more closely emulates that of short strangles.
