Why Overnight Risk is Huge: Even Down Days are Boring
Why Overnight Risk is Huge: Even Down Days are Boring
Yes, it appears that there is fear in the market again. However, I would argue that today was utterly boring, if I were to look at the way the market moved. Take a look at how the market moved throughout the day:
livevol (r) www.livevol.com
We can see that the market initially gapped down, and then proceeded to slowly grind down until about 3:00 EST. At that point, it turned around and grinded right back up about 5 points. Volatility in Mar and April acted much the same. While the vol of vol was certainly more interesting than SPX, I would never call today's vol action whippy. The VIX, essentially, hung around between 20.50 and 21 all day.
This is all well and good, but how does this affect you? Well, I think there is an important point to be made on overnight risk. Over the year, the risk of movement in the overnight hours with a big gap open has been much more of a problem than intraday sell offs (although they have happened). This is a key that many traders fail to manage in dealing with short IV positions. One of the errors many traders make is this:
livevol (r) www.livevol.com
A position is moving against him or her but does not touch an adjustment point. At that point, many retail traders will make the mistake of going home with a big overnight delta. This is usually where they will get into trouble. Because they fail to recognize that in the overnight a position is as likely, if not more likely, to get completely wrecked by an event out in Europe or even in the US. Traders manage those deltas overnight, or you will end up sleeping outside over night.
Where to Next:
We are just seeing a break out. However, I want to point out one small thing; I was looking at near dayís end, and while the VIX was high, SPX IV around 1343 is a bit lower than the last time we hit 1343. While this is not a sign of what might happen tomorrow, it still points toward volatility cooling off, not heading up in the long run. My prediction, this is much hype and little action, unless nonfarm could be the deal breaker.
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Mark Sebastian is the Director of Eduction for Option Pit, and a former market maker on both the Chicago Board Options Exchange and the American Stock Exchange. He is co-host of "Option Block," the wildly popular show on The Options Insider Radio Network.
He has been published in nationally on Yahoo Finance, quoted in the Wall Street Journal is a featured contributor for TheStreet.com. He also writes regularly for SFO, and OptionsZone, and is the managing editor for Expiring Monthly: The Option Traders Journal.
To learn more about Option Pit and its mentoring services, please visit OptionPit.com
About Mark Sebastian
Mark Sebastian is a former market maker on both the Chicago Board Options Exchange and the American Stock Exchange. Along with his role directing the path of education for Option Pit, Mark is currently the director of risk for a private hedge fund. He writes a daily blog, the Option Pit blog, formerly Option911. Sebastian has been published nationally on Yahoo Finance, Google finance, Financial Times Alphaville and is a featured contributor for TheStreet.com. He is also published regularly at SFO, the Options Insider, and is one of the Co-Hosts of The Option Block Podcast, a featured Podcast from Options Insider Radio. Mark is the managing editor for Expiring Monthly: The Option Traders Journal. Sebastian has a Bachelor's in Science from Villanova University.
To learn more about Option Pit and their mentoring services, please visit: http://www.optionpit.com
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