After months of low volatility, traders of credit spreads like me are saying “No Mas!” For sellers of option premium, specifically credit spreads, these would appear to be the golden days as volatility has gone through the roof (although easing back a little as of late). However, despite inflated premiums, it has been hard for folks like me to find a lot of good opportunities. Why? Well, it’s the flip side of sky high volatility which are wider bid/ask spreads and lower liquidity. An important part of trading credit spreads is not only getting into the trade, but the ability of getting OUT, especially when the market is moving as crazy as it has lately. I NEVER take a full loss on a position that goes against me so I want to be able to exit early if things don’t look good. Well, what are our alternatives? #1 Be real choosy. There are some stocks that tend to always have a lot of option activity. This should keep bid/ask spreads tighter #2 Look at monthly options. Weeklies tend to be less traded and are generally less liquid to begin with. #3 Look into index options. Not my preference as I prefer individual stock trades but these tend to have a lot better liquidity. If betting on broad market or sector movements is your thing, then its a good place to focus.
So, are we moving towards a Goldilocks period for credit spread traders? Maybe. After peaking around 84 in the middle of March, the VIX has steadily fallen to end about 42 on Friday. That’s a 50% fall in only about 3 weeks.
There are a LOT of things to work through in this Pandemic but if (when) we begin to peak and turn the corner volatility will continue to fall and the market won’t move in such lock step. This will create individual opportunities again. It may be a while before volatility falls to pre-crisis levels (it was too low anyway) so we may get into several months of moderate volatility, which for those who like to sell premium through credit spreads, business may pick up mightily!
My best in Trading,
Joe Simmons, CFA