Last Update: August 2021

Volatility done got sucked into a black hole. Gone. Just like that. Traders who just last month were feasting on fat premiums are now nibbling on scraps. Blame it on the massive moonshot in stocks, the gravity-defying ascent. The rip-roaring 13% rally in the S&P 500 has removed any and all fear from the marketplace. With sunshine and lollipops now raining down from the heavens, no one wants to pay up for protection.

I would be remiss if I didn’t highlight a lesson or two we can all take away from the market’s recovery.

First, take a look at the accompanying chart which illustrates the CBOE Volatility Index (VIX). For the uninitiated, the VIX is Wall Street’s favorite fear gauge. The one that measures demand for options on the S&P 500. In other words, it’s the implied volatility for S&P 500 options. Last month the VIX popped to 30 amid widespread fears. You know, the kind that keep investors up at night worrying about the next big bad bear market. While option buyers bemoan the high volatility and burdensome prices required to acquire protection, option sellers embrace it. High volatility equals more money, better paydays if you will.

But oh how the tables have turned. Take note of the right side of Batman’s face. See that sharp drop? That right there, kiddies, is an epic volatility crush. Anyone short volatility just received a big ol’ Christmas present. And in case you didn’t know it, anyone short options is short volatility. So if you had a covered call, naked put, or credit spread and the like, you benefited greatly from the VIX dump.

Don’t ever forget that volatility is mean-reverting. Unlike stocks where what goes up can keep going up, like, forever. In the world of volatility what goes up must come down. It’s never a matter of if, just a matter of when. Option sellers take advantage of that eventuality by upping the ante when the VIX is in the stratosphere. Such is the time to increase your premium-selling ventures to properly exploit the fatness, baby. The potential return on investment afforded by covered calls, naked puts, and the like were juiced last month.

But now? Not so much. Such is why Gino, the Master of Money, the Purveyor of Profits, the Theta Maker himself, elected to hold off on any credit trades in this week’s Options Report.

Now, this isn’t to say certain option selling strategies were a lay-up last month. Entering naked puts and bull put spreads when the bears are roaming Wall Street takes some serious conviction. It’s a bit frightening to bet against the grim reaper when the S&P 500 is sick on its death bed. But that’s when you get paid the most. So buck up and do it. Next time, of course. Unless you have a time machine. In which case we should be friends. Word is I’m a fantastic friend. Like, the best.

A final note on covered calls. While you’re certainly not getting paid much to sell April covered calls (if you haven’t already), it’s still a good idea to do so. Odds are your stock is mega overbought and in need of a pullback. High premium or not, the protection afforded by short calls is better than no protection at all if the market finally pulls back here.

Batman, out.

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