One of the most important parts of my process in selecting potential options trades is to assess the current volatility situation. Everything else being equal, I like to put on trades that position myself for volatility to revert to its mean. In other words, if volatility is high and therefore options prices are high, I want to express my directional trade in such a way that it might also benefit from volatility falling back to “normal” levels. Conversely, when volatility is low, I want any position I consider to benefit from a rise in volatility — if there is one.
There are no free lunches on Wall Street, nor in options trading. But betting on volatility reverting to the mean might be one of the closest things to it. The trick is in the timing.
Of all the most liquid ETFs I track, the one that has been the quietest lately — in terms of price action and volatility in options pricing — is the Retail Sector ETF $XRT. In fact, volatility in $XRT is currently at the lowest levels last seen in 2018 before the Christmas selloff. This has given me a wild idea… [Read more…]