The price action continues to disappoint everyone but option sellers. Our seven-day range was $400 (and really $200 for most of the week).
Realized 10 and 15-day vol is around 26%. The IV is drifting lower in the front month.
Calls skew is weaker and put skew is stronger across maturities. Given the lack of action, accumulation wings relative to straddles appears to be the most prudent course of action as long as traders stay away from paying out time decay.
Let us review last week’s recommendations:
- Strangles vs straddles are attractive in July. Given Gamma underperformance, we think they should be spread to straddles on a Vega neutral or slightly Vega short ratios.
- September and December puts are somewhat attractive vs. Straddles. We would also lean slightly Vega short given Gamma underperformance. We do not want to pay out theta now.
- Spot to July contango is around $65. We look to lighten up positions on pullbacks and reestablish widening on the spread.
Vega short (or structure decaying short) in July worked via collecting decay and slight smile appreciation. The puts are now a little expensive vs. calls.
September put skew is up and vol is down (plus decay), so Vega short leveraged put spreads have worked. Puts are now relatively fair.
December vol and skew are unchanged. We recommend staying long December put skew.
The lack of movement prevents us from recommending buying options outright. However, hedgers and speculators can get cheap leverage to both upside and downside.
This week’s recommendations:
- Calls vs. straddles are attractive in July. Given Gamma underperformance, we think they should be spread to straddles on a slightly Vega short ratio.
- December puts are somewhat attractive vs. Straddles. We would also lean slightly Vega short, given Gamma underperformance. We do not want to pay out theta now.
- Spot to July contango is around $40. We look to lighten up positions on pullbacks.
The entirety of this report attempts to identify the best option structures available. Readers should overlay it with their directional view by under-hedging or over-hedging their preferred option structure.
