We are in the middle of earnings season. As earnings reports hit the market, some stocks react to the downside like GE Aerospace (GE) which is down 4.8% as of this writing. Other stocks react to the news by rallying, like RTX Corp (RTX) which is up 1.59% in premarket. Both stocks are in the S&P 500 index. What’s interesting is how rising and falling stocks cause volatility to decline. The whole purpose of indexing, which is a way for an investor to easily get diversified, is to reduce volatility so one bad stock doesn’t hurt your overall performance. The indicator that measures whether stocks are stocks moving in the same direction or in different directions is correlation. When correlation is low as it is right now, it is rare for the index to make a big move.
We have a limited-risk, high-probability strategy for trading index options when correlation is very low like this. We just need the market to move in a direction that gives us the right price. There may be just enough fear due to bond market action that we can get the price we need for this trade to be balanced in our favor.
This Volatility Term Structure chart for SPX shows the implied volatility of the options expiring today has the lowest volatility expectations. The market is not expecting a big move in the index. The index is down in pre-open trading this morning as the bond market is down as investors may be rethinking the Fed’s rate cut path. That could help us get the price we need for our strategy this morning.
Correlation on the S&P 500 is very low as both positive and negative earnings reports keep changes in the index prices low. Volatility expectations are also very low for the zero-days-to-expiration (0DTE) trade. But there may be enough fear as the bond market sells off that we can get a good price on our favorite Put Credit Spread strategy. If we can get the right price, the low correlation works in our favor.
To get the specific details and prices on today’s trade ideas, be sure to read today’s ODDS Online Daily Option Trade Idea.
To access Odds Online Daily and be able to see any stock you are tracking in this software, click here.
Thank you,
Don Fishback
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