Managing Directional Risk

While many traders focus on statistics-based volatility positions that leverage the mean reversion philosophy, it’s important to recognize that even these types of exposures can be subject to a degree of directional risk—especially aggregate directional exposure at the portfolio level.  The question is whether or not there’s a good way to manage that risk, or … Continued

Crude Oil Volatility Pops

Trade wars aren’t much fun, but the world was reminded over the weekend that a real war—or the specter of one—is even worse. The threat of an expanded global military conflict intensified Saturday when drones attacked critical oil production and distribution facilities in Saudi Arabia were attacked by drones.  The havoc wreaked on assets owned … Continued

How a Pork Deal Could Save the Equity Market’s Bacon

For most people in the United States, the trade war narrative has likely transformed into a mind-numbing soundbite that simply won’t go away — the type of news coverage that earns an immediate click of the TV remote control.  And while traders and investors are also likely starting to tire of the ongoing trade war … Continued

The Equity Index Pairs Trade

For pairs traders that are filtering for potential signals in the market, the current trading relationship between the S&P 500 (/ES) and the Nasdaq (/NQ) may be worth a closer look. Pairs in this case refers to the trading approach often taken when a strong correlation between two underlyings breaks down temporarily, allowing for an … Continued

VIX: ‘Cluster, Pop, Revert’ Strikes Again

With the second full trading week of September getting underway, a quick glance at the some of the most closely followed market gauges provides strong insight into the current mood of the markets. And compared to the last several weeks of trading, it might be best characterized as a “mellow mood.” The VIX, after all, … Continued

Trading the CBOE Skew Index

Skew is an options trading term that describes the fact that the implied volatility of options on the same underlying and in the same expiration are different from strike to strike. You may have already noticed when looking across the strikes in a given expiration month that different strikes have different implied volatilities. If skew … Continued

High Volatility in the Euro: There is a trade for that

Whether you’re trading equities, bonds, or commodities (or all three), there’s been a plethora of good opportunities to add currencies to the portfolio during the month of August.. And with volatility spiking in all of those markets, it’s likely traders have added at least a few new short premium positions in the last couple weeks—especially … Continued

Straddles Minimize Exposure to Outlier Moves

One of the biggest threats when trading short volatility is the risk of a big, unexpected move (i.e. outlier move) in the underlying price. Options are priced according to historical volatility, as well as the market’s expectation for future volatility. That means unanticipated events can sometimes derail the expected performance of a short premium position. … Continued

Stalking the Soybean-Corn Ratio Amid Falling Corn Prices

While cryptocurrencies have become synonymous with extreme volatility, the year 2019 has seen many “old school” trading products see a noticeable uptick in daily movement. At the top of this list, in terms of shock value, has been the increasing volatility exhibited in many agricultural commodities, like soybeans, wheat, and corn. Agricultural products such as … Continued

The Yield Curve in Perspective

The “yield curve” interest rates have (deservedly) received an outsized amount of attention in recent weeks. This was particularly true in the second full week of August, when yields on most worldwide sovereign bonds slumped as investors clamored to buy them.  Bond prices and bond yields historically share a very strong inverse relationship, so as … Continued