Implied Volatility. Is The IV Crush Going To Continue?

The market's been higher for a few consecutive days, and as I write this, futures for today's trading are higher.  As a result, implied volatility has come tumbling down.  And that offers opportunities that have been scarce lately.

I don't know if that IV decline will continue, but if you own positions that require protection, now may be an appropriate time to buy a small quantity of extra puts and/or calls – just in case the market makes a big move.

It may also be time to take advantage of the volatility crunch by buying back some short options positions – especially if they have reached levels where there's not too much left to earn.  Ive been buying in RUT March call spreads (half of the March iron condor positions) at prices below $0.35.  I'm hoping to get some put spreads on today's rally.  I've been bidding every day, but those OTM put option spreads are very slow to shrink in market value, and no one is actively selling them.   Maybe one more rally day will do it.

If you believe this drop in option implied volatility is going to continue, then you can take a different approach.  You can open new positions that are short vega (the volatility component in the price of an option).  Two methods for doing that include the sale of credit sprads and the purchase of iron condors.

Predicting future trends in implied option volatility is no easier than picking the direction in which the stock market is going to move.  But, if you want to express an opinion and 'bet' on it, here's an opportunity to do so.

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9 Responses to Implied Volatility. Is The IV Crush Going To Continue?

  1. Jim Lindor 01/28/2009 at 11:30 AM #

    Hi Mark,
    Can you get better fills by entering an IC as two vertical spreads? I’m not referring to legging in. Just wondering if two legs are easier than four legs for getting good fills.
    Thanks,
    Jim

  2. Mark Wolfinger 01/28/2009 at 12:32 PM #

    Yes, it’s possible. I always try the full IC first, just to see if I can get my price. If I can’t, then I try to leg one spread first.
    When entering IC as two spread orders, I begin with the one my portfolio can tolerate: If upside risk is grater than downside risk, I enter put spread first. Then, if not filled on call spread at acceptable price (after filled on put spread), I have two choices: either take lower price, or forget the call spread (for now) because my portfolio is ok overall.
    If you enter one spread order – you cannot afford to simply wait for the market to move and then get filled. If you do that, you won’t get a good price on the other half of IC.
    I suggest you begin by entering both orders at same time – looking to collect 10 to 15 cents better on each leg. Then if you get one, you have room to lower your price on other and still come out better than your target.
    Doesn’t always work.

  3. rluser 01/28/2009 at 1:16 PM #

    Wow. I definitely had to buy back some front month put spreads in financials. At $0.25 apiece I could not see the sense in waiting. I hope you found nice prices to recover some put spreads too.

  4. Mark Wolfinger 01/28/2009 at 1:45 PM #

    Agree. That last quarter can become very expensive very quickly.
    Considering that I had already bought the call spread half of my RUT iron condors, I’m thrilled to be able to buy in the puts, lock in the profits, reduce the risk, and free up margin – if I want to add to my April positions.
    I may decide to sit it our for now.

  5. Jim Lindor 01/28/2009 at 10:54 PM #

    Thanks Mark.
    In a Twitter yesterday you wrote “IV (RVX) down 3 points today,
    but there are no sellers of put spreads”.
    What did you see that led you to say there were no sellers of put
    spreads? Was it because you could not get a good fill?

  6. Mark Wolfinger 01/29/2009 at 7:05 AM #

    I suppose my statement was too broad to be accurate. To me my statement meant: “Here I am bidding thirty five cents for spreads that are so far out of the money that I simply don’t understand why the market makers aren’t fighting with themselves to sell them to me. With RUT in the 470s, I was bidding for the March 300/310 put spread. With implied vols falling, where are the traders who sell this OTM stuff?”
    The answer is that too few people take the risk of selling 8-week spreads for such small sums. There are individual investors who do, but unless they were looking for that specific spread, it’s unlikely they knew my bid existed. Too frustrating for me. I finally paid 40 cents and although that’s a nickel above my ‘limit’ for closing garbage spreads, I wanted to get this position closed to free up $40k in margin. I’ll use some of margin for more April IC positions – especially if IV increases again.

  7. Jim Lindor 01/29/2009 at 1:53 PM #

    I sold an IC as one unit. Now I realize that I don’t know how
    much credit I received for each leg which will make it more
    difficult to make adjustment decisions.

  8. Mark Wolfinger 01/29/2009 at 2:16 PM #

    I find this to be very troubling. You should not feel overwhelmed by this. You have all the information you need.
    You do know the prices of the trades.
    None of this matters when adjusting.
    I’m expanding this reply via a blog post tomorrow morning.
    In response to your earlier comment: There is supposed to be a link (on this page) that allows you to subscribe to the comment feed.

  9. Jim Lindor 01/29/2009 at 2:37 PM #

    >>You do know the prices of the trades.
    Thanks. I found the prices.
    I’m very interested in seeing your post tomorrow about why the price paid for a spread is not a factor when considering whether to adjust.
    Thanks for your very helpful blog.
    I guess I should go now and read the adjustment section of your Rookies book again. 🙂