Options Traders Uncover the Mysteries of Implied Volatility: E-minis and SPY Provide an Example

The rally in Stocks has the Bulls flying out of the woodwork. On February 11th, numerous money managers described the market beleaguered by a recession and likely not to return to former highs for years to come. The sentiment, along with the Stock Market, has changed dramatically. While the VIX (CBOE Market Volatility Index) is near its lows of the year, the structure of the Implied Volatility Skew in the E-mini remains its typical self. There is a strong bias to the Put Side with Implied Volatility of out-of-the money Puts substantially higher than out-of-the money Calls. Whether you are trading E-minis (E-mini S&P 500 Futures) or SPY (SPDR S&P 500 ETF) the structure of prices remains the same and traders are able to structure trades to gain a long-term pricing advantage.

At Options Strategy Network our goal is to help Individuals and Corporations design positions that meet their risk/reward requirements by enabling them to build appropriate positions through the analysis of liquidity, historical and implied volatility, the skew and the best options strategy to meet their goals. Contact us  to structure a program that meets your individual or corporate requirements. Our thirty years of trading and risk management experience can be an excellent addition to your skills.

The Table below is an Option Evaluation of the June E-mini Contract which expires on June 17th. While it may be cluttered with a lot of information, it includes the numbers necessary to evaluate an Options Series and strategize what type of position may meet your risk/reward parameters. In its simplest form, we’ll look at the 2000 Puts and the 2150 Calls, outlined in green. The price of the June Futures was 2075.50 just before the close on Wednesday. The price of the 2150 Calls, approximately 75 points out-of-the money is, taking the mid-point of the Bid/Ask Spread, 11.38, while the 2000 Put, also approximately 75 points from the current Futures Price, is 26.00. While that may not be a revelation to most of you, it is always surprising to see how much Implied Volatility Skew can impact the price of options that are equidistant from a market’s current price. In this case the Puts have an Implied Volatility of 16.34% while the Calls have one of 10.33%. You won’t find this Implied Volatility structure in the Gold Market; that’s for sure.

If one wanted to get Long Stocks and felt comfortable taking delivery of the E-mini contract 3.64% lower than its current level (the 2000 level) and wanted to take advantage of the market rallying, they could Sell the 2000 Puts and Buy the 2150 Calls for a credit of 14.62. This is a Bull Fence Strategy. I’m not recommending getting Long at these levels, but if you were comfortable Buying some Stock if the market fell and wanted to participate if we rallied sharply to the upside, then a Bull Fence might be an excellent strategy. Due to the Skew, there are bearish strategies which can enable traders to either get Short the E-minis or Hedge Long Positions with excellent value. Contact us learn about our private Webinar Training Sessions which can bring your Options Trading to another level.

In addition to price and Implied Volatility information, the Table below provides some of the Greeks, Historical Volatility and Relative Strength. In addition, it shows the Option Liquidity Percentage, or the difference between the Bid/Ask Spread of the out-of-the money Option as a Percentage of the value of the asset. The more a trader gives up in edge and commissions, the more difficult it is to make money. Whether you’re trading Stock Options, Options on ETFs or Futures, analyzing Implied Volatility and these other factors will make you a better trader.

OPTIONS TRADING INVOLVES SIGNIFICANT RISK AND IS NOT SUITABLE FOR EVERY INVESTOR. THE INFORMATION IS OBTAINED FROM SOURCES BELIEVED TO BE RELIABLE, BUT IS IN NO WAY GUARANTEED. PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS.

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