RUT Volatility and Trade Idea

I was flipping through some of my charts this morning and I found a chart that I want to discuss. One of the most important parts of my option trading is knowing and understanding volatility. Having a good understanding of volatility is important, and I try to keep my approach as simple as possible. The last thing that I want is to over complicate my trading. With that said, looking at the RVX (RUT vol index) we are testing lows.

Looking at the chart above we are clearly on the low end of the range, and I want to take advantage of this “opportunity”. Getting long volatility might be a good idea. I am also slightly bearish on RUT and would want to participate in any move lower. Whether that move lower be a day or a week, I think its in the cards. Below is the trade idea that I put together. The trade idea is a bearish call diagonal. The idea of this trade is to position yourself with long vega, short deltas, and positive theta. Basically the idea is to move lower, but if we are wrong we have the majority of the wing higher up. So if we move higher we can profit at the short strike.The obvious thing is the move higher we would want to be slow. This is a great trade if you think the RUT will sell off and IV will spike.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s