Wednesday, April 6, 2016

Tale of the Chart: Implied Volatility

As is abundantly clear from difficulties in finding trades so far this year, implied volatility has hit a dry spell, a period of drought worthy of the Sonoran Desert. And when IV is low, my strategy of selling implied volatility simply grinds to a halt.

How low?

Click on chart to enlarge.

VIX on April 6, 2016, 90 days 2-hour bars

Presently the VIX, which tracks the implied volatility of the S&P 500, stands at 14.61%.

A peak was reached on Jan. 20 at 32.09%. The low so far in the decline was recorded April 1, at 13.00%.

The present level stands at the 9th percentile the range from Jan. 20 to April 1. Under my guidelines, I won't sell volatility until it is at the 60th percentile, under the venerable short-seller maxim of Sell High, Buy Low.

Under my rules, the S&P 500 won't be tradable until its implied volatility hits 24.46%, more than 10 percentage points away.

I could, of course, compromise my standards, but that would mean selling low and buying, perhaps, higher, a certain recipe for loss. As a short-term trader with a long-term horizon, I am content to sit out the dry spell until the rains come again.

-- Tim Bovee, Portland, Oregon, April 6, 2016


Tradecraft: Playing the odds to build winning stock market trades from options, a description of how I trade, can be read here.


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Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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