Markets pushed higher yesterday on the back of encouraging commentary out of the Fed and JP Morgan Chase's (JPM) buyback and increased dividend announcement. The S&P500 closed Tuesday at 1395.95 up 1.8%. The 1.8% gain marked the largest one-day move in the S&P500 this year. As expected the VIX, fresh off a 8.6% decline on Monday, furthered its descent falling 0.84 points, or roughly 5.4%, to close at 14.80. VIX futures fell across the board as well but the spread between front month and six month VIX futures still remains around 10. The spread between spot VIX and the front month VIX future measures 2.20 with 5 trading days left until expiration.
Yesterday we noted that even with the VIX trading at seemingly cheap levels when you look at the index compared to 21-day realized volatility it was still trading at a spread (5.5) in excess of its historical spread (~4). With yesterday's strong market rally that spread has shrunk to 3.7, below the historical average. That being said I don't think the risk/reward of selling volatility at these levels would be a wise call!
On tap today we have Import/Export Prices and Crude Inventory reports due out in the morning. The earnings calendar has lightened up significantly with no major announcements expected today. As part of our educational series today we take a look at the ratio spread options strategy and how to properly trade the spread for maximum profit.
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