Waiting for that Market Crash and Spike in Implied Volatility
The market keeps on soaring higher and higher hitting all time highs for the S&P and Dow 30. Is this sustainable? Are we in a credit bubble? The Fed will keep on pumping bond liquidity in the market keeping Interest Rates artificially low. In this environment, money will continue to flow into equities, particularly dividend paying stocks to get that investment yield.
Future Fed Chairman Janet Yellen will most likely continue this low interest rate policy until the economy shows strong job and GDP growth. The Fed will not likely taper from their bond liquidity policy until at least March 2014, but many of the talking heads on CNBC think it will be much longer and possibly into 2015 as the economy works to reduce the 7 plus percent unemployment rate. Will the market finally crash once the tapering begins? Will another catalyst or event cause the market to crash?
While I have the time, I will be preparing for the inevitable crash or massive correction with Option Strategies thriving in High Implied Volatility environments. I will be looking for stocks with high implied volatility to begin practicing these strategies as to prepare when all stocks will have high implied volatility caused by a crash, similar to the 2008-2009 financial crisis. Here are the strategies that I will be looking at:
1. Short Ratio Spreads - Use a 1x2 Put Spread or 2x3 Put Spread to be a net seller. Use on stocks that I would eventually want to own due to the net short naked put.
2. Iron Cockroaches - A Random Walk Trading specialty!
3. The Jade Lizard - Will post a video from Tasty Trade where I learned this unique options strategy.
4. Broken Wing Butterfly - Should I only execute this trade on the SPX and RUT or expand to stocks?
5. Risk Reversal Call Spreads - Use this when I try to time the bottom, and use this strategy on stocks that I want to own due to the selling of a naked put.
6. The Christmas Tree - This is similar to a Short Put Ratio backspread but instead of selling 2 of the same strikes, you buy one near ATM Put, sell a lower OTM put, then sell an even lower OTM Put to form a "Christmas Tree" risk graph look.
I will need to figure out what stocks to use per strategy some have a naked put component to the trade. I will have these High Implied Volatility option strategies in my toolbox by the time the sky is falling and everybody is panicking.
