With VIX options expiring on Wednesday and VXX options expiring today (technically tomorrow) in the normal monthly expiration cycle, this is a big week for volatility traders who are comfortable holding options positions into expiration.
One of the things I like about expiration week is the manner in which time and volatility can sometimes become distorted, presenting some interesting trading opportunities.
Looking at the implied volatility of VXX this week, one can see that August IV (red line) was tracking in a fairly tight range of 60-70 from Monday through Wednesday. Yesterday saw a little more noise and some IV spikes into the upper 70s. Today there has been a quantum change in implied volatility, with VXX IV shooting up over 120 and gyrating wildly throughout the session, as the chart below shows. Interestingly, the underlying VXX ETF has not been particularly volatile today. I attribute much of the erratic change in implied volatility to the approach of options expiration.
While VXX options are certainly not for the faint of heart, particularly during expiration, in my opinion these newfangled products are just the place where retail traders are more likely to be able to find an edge than some of the better-known institutional warhorses.
- Record Call Activity in VXX
- VXX Calls Attracting Interest
- Chart of the Week: VXX Options
- CBOE Launches Options on VXX and VXZ
- Why the VXX Is Not a Good Short-Term or Long-Term Play
- VXX Calculations, VIX Futures and Time Decay
- Trading Options Expiration Days
Disclosure(s): short VXX at time of writing; Livevol is an advertiser on VIX and More
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VXX Implied Volatility Spikes into Expiration
Last week I made my first trade using weekly options. Part of the reason I am so excited about weeklys is that I would not have made the trade had only standard monthly options been available.
Last Monday, after the markets had jumped more than 2%, I was of the opinion that we would have choppy trading on Tuesday through Thursday, as investors chose to sit on the sidelines in advance of Fridayâ€™s nonfarm payrolls report.
My trade of choice was a short straddle and my preferred underlying was IWM, the iShares Russell 2000 Index ETF. When I looked at the available options, the weeklys almost jumped off of the page, with superb liquidity and much higher implied volatility. As the intent of my trade was to take maximum advantage of time decay (theta), choosing the weeklys were a no-brainer.
A look at the chart below shows the difference in IV between the IWM weekly options that expire this Friday (red line) and the standard monthly options that expire the following week (yellow line.) All things being equal (and they never are) the higher implied volatility of the shorter-dated weeklys translates into substantially higher time decay.
Soâ€¦if you are comfortable trading options that are toward the end of the expiration cycle, take a close look at the weeklys. If you are not comfortable doing this (controlling gamma risk is critical), then perhaps future posts on weekly options will assist in this regard.
For more on related subjects, readers are encouraged to check out:
- Weekly Options Gain Momentum
- The Sideways Play
- Straddles vs. Iron Butterflies
- Is the SPX Going to Stick Close to 900?
- SPX Straddle Case Study Update
Disclosure(s): long IWM at time of writing; Livevol is an advertiser on VIX and More
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What a Difference a Weekly Makes
Up until a couple of weeks ago, it was almost impossible to find anyone who thought it was worthwhile to mention weekly options: options that have the same terms as standard monthly options, except that they expire on every Friday other than the third Friday of the month (which is when standard monthly options expire.)
For those who find the definition above a little too sparse, the CBOE has an excellent FAQ for weeklys; the Options Industry Council (OIC) also has a weekly options FAQ for those who wish to learn a little more about these products.
Some of my fellow bloggers have already taken up the cause of weekly options and have shared some of their initial thinking on the subject:
- Weekly Options for the Masses â€“ SPX, QQQQ, IWM, DIA and Others (Six Figure Investing)
- Weekly Options Could Affect Stock Prices (Adam Warner, InvestorPlace)
- WeeklyOptionPalooza (Adam Warner, Daily Options Report)
- Weekly Options and Pinning Effects (Steve Place, Investing With Options)
Before anyone gets too excited about new products, one of the first questions is invariably about liquidity and market depth. Rest assured, there is already substantial liquidity and market depth in the weekly options being offered. In the table below, I have calculated todayâ€™s volume in weekly options and standard options for the two at-the-money strikes for all the weeklys listed by the CBOE. Note that for the most part, the weekly options volumes are running at about one third to one half of the rate of the standard monthly options. In the case of IWM and DNDN, todayâ€™s weekly volume exceeded the volume in the monthly options.
For the record, I made my first weekly option trade last week and I was excited because it was a trade I never would have made unless it was near the end of an expiration cycle â€“ a time frame many options traders avoid, but I like to embrace. Given the increasing popularity of weekly options and new end-of-cycle trading opportunities, I would recommend that anyone who has not already done so to spend some time with Jeff Augenâ€™s excellent Trading Options at Expiration, where many of Jeffâ€™s ideas can now be applied on a weekly basis.
I will have a lot to say about weeklys (blame the CBOE for the spelling choice) going forward. In the meantime, readers looking to learn more about these products should start with the CBOE Weekly Options splash page.
Disclosure(s): long IWM at time of writing; both the CBOE and Livevol are advertisers on VIX and More
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Weekly Options Gain Momentum