Thursday, February 11, 2010

02/11 Daily Summary

Rolling along, I was planning to add my MNX iron butterfly Today but decided against it for one main reason: Market makers already adjusted the volatility to amount for the extended weekend, this dropped option values artificially and I don’t want to get sucked in a lower value because of the long weekend. My plan is to come in on Tuesday (30 Days Till Expiration). Not what I wanted, but then again, a day with compressed volatility is not a good entry signal in my mind.

Today was an entry signal on my directional butterfly strategy, but I honestly have to revise my trading plan as I can’t be spreading myself too thin, so will focus on fewer trades and less management intensive strategies (i.e. weekly strategies and iron butterflies).


Tim said...

How can you tell when market makers drop IV to compensate for the long weekend?

Gustavo's Trades said...

You can't really tell for sure, it is just a known fact. Just see that the market went higher, but not that much and volatility compressed by a lot (around 8%)..

It is usual for prices to compress around Friday, specially prior to a long weekend. The rationale behind is that market makers do not want to buy the time-decay over the weekend, so as much as possible, they reduce the price (thus vols go lower).

Selling under these circunstances would mean you're taking over all the weekend risk and little of the time decay.. It is better to wait around and come in early next week. That's my plan.