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Tackle Today: The Volatility Crush

January 13, 2023

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This week’s levitation in risk assets has had ripple effects. One of the most pronounced has been the impact on implied volatility. It’s gone down, way down. And it qualifies as a volatility crush.

That hissing sound you’ve heard for the past two weeks has been the air coming out of option premiums. Puts, once pumped, are now less so. And the result has been dramatic. OTM February puts on SPY, IWM, and the like still have 35 days left. But their values have dropped by about one-third, just in the last few days. This has been a boon to traders carrying short puts or put spreads into the week.

It also means the payday for new short put trades has shrunk.

The CBOE Volatility Index (VIX) kissed 24 on the first trading day of the new year. Now it boasts an 18-handle, and it’s sitting at a one-year low.

Chart of the Day: CBOE Volatility Index (VIX)

If you waited for the CPI and unemployment reports to pass before selling puts, then realize uncertainty has dropped, but so too has your payday. That’s the way it goes. 

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