The Difference in Trading SPX vs SPY

In this session, we discuss the index options on SPX and compare them to the stock options on SPY. While they are both following the same S&P 500 Index, there are subtle differences that can create gains or losses. SPX options have many different rules for trading times, expiration and delivery. We also cover why selling short term SPX options and SPY option contracts are no longer a great trade as the market has changed.

Trading Earnings

The public often makes a very classic mistake trading earnings. They think they have an edge because a stock will have more volatility the day after earnings. So, they buy options and are disappointed when the typical (68% probability) volatility crush occurs. Instead, someone needs to understand certain aspects of earnings. #1 – A stock will move more than usual (daily ATR). #2 – That is already priced into the options. #3 – The volatility crush is the most likely outcome but has the greater risk (short straddle example). Learn to understand why stocks move on the results and even more on the forecast (top and bottom line). Learn to profit as a long vol or short vol trader.

5 Types of Option Volatility

We often think of volatility as simply volatility aka historical volatility and implied volatility. In options trading pricing, we divide volatility into historic volatility and implied volatility, but that still doesn’t give us the entire picture. In this session we discuss five types of volatility: fundamental volatility; stock volatility; historic volatility; implied volatility; and, market volatility.

Earnings Volatility & Implied Vol Around Earnings

At this point, you’ve already studied the difference between historic and implied volatility and their impact on the pricing of options around option volatility earnings. Implied volatility is a measure of the effect of supply and demand on the price of the option itself. The more traders want to buy an option on a particular stock, the greater the price the options market makers will demand for that option. Prior to events that can be anticipated, particularly earnings reports, the demand for options on the underlying stock increases, increasing the price of the option. After the anticipated event has unfolded and the underlying stock moved, up, down, or gone nowhere, demand for the options drops off dramatically. This drop off in demand means that market makers may no longer charge an inflated premium for writing the options and the overall price of the options declines accordingly. This is also known as a volatility crush.

Determine Range Before Earnings

How to determine trading range on earnings reports. One of the most powerful uses of the options market is gauging the expected move of any asset where options are traded. Implied Volatility is exactly that – the market’s expectation for future moves. This use of stock options is very helpful before earnings reports on a stock where you can see exactly what the expected trading range is expected by the market. We discuss implied volatility before earnings and implied volatility after earnings. Before earnings, you typically get volatility swell and after you get volatility crush. Understanding volatility on earnings reports will help you how to determine trading range on earnings reports.

Trading the Volatility Index VIX

Our goal is by the end of this class, you know more about the VIX than 99.9% of people alive! Here are some of the concepts taught: European style options, cash settlement, expiration dates, VIX futures, avoidance of unlimited risk strategies, hedging concepts and much much more!