Oh, wait.

That was from April 2011. 10 points ago.

Remember, when you get long $UNG, you are not bullish natural gas.

You are bullish short term natural gas futures contracts, and speculating that the roll yield will “suck less” this month.

Let’s take a look at CME Natural Gas Futures, through various months:

Here’s the deal– unless the steepness of this curve is reduced or goes negative, there will be a mathematical headwind in $UNG. So you may be able to trade it, but it’s in the same bucket as $TZA or $FAZ in terms of “investability.”

After all, volatility is oversold, right?

Right?

Not so fast.

What Are You Measuring?

When you want to get a feel for volatility, you have to look at implied as well as realized.

Here’s a look at 20-day realized volatility for the $SPX:

That last reading? 7.41%. That’s absurdly low, especially compared to where we were last quarter.

So if you think that this new volatility will become the normal volatility, the $VIX is actually still at a hefty premium. Let’s compare 30-day implied volatility and 20-day historical volatility:

chart courtesy of LiveVolPro

Implieds are still trading at a tremendous discount relative to the slow climb exhibited over the past month.

So if you want to be bullish vol, you are making the claim that realied vol will increase– and that the market will be putting in a short term top soon. Tough call.

A Look At History

Where’s vol relative to the past? Well, we can take a look at past volatility readings over the past 20 years:

Distribution of realized volatility resemembles a gamma distribution or a poisson distribution, and eyeballing it we can see that the bulk of the readings lie between about 8 and 12. So vol is on the low side, but still “normal” relative to longer term readings.

But what if we just look at the past 5 years?

This tells a different story– the chart, although a bit more messy, shows the bulk of samples between about 11-20. So looking at recent price history we get a feel that volatility is very overdone to the downside.

If you are looking for a pop, check out 4 simple ways to hedge in this environment.

If you think we’re in a new normal… well, welcome to 2006.

That’s the best description of this market right now.

And after the on/off macro trading back last quarter, it’s a great reprieve. I don’t feel obligated to get futures quotes at 2:30 AM anymore.

Is volatility a buy here? Maybe, maybe not. The $VIX at 19.40 is certainly stretched to the downside from where we were a few months ago, but it’s still above long term averages.

And on top of that, the realized volatility in this market is at a whopping 8.75.

How things can change over the course of 3 weeks!

Lower volatility, both realized and implied, brings about a completely different set of challenges for options traders.

Today we’ll look at what trades you could consider if you are looking to hedge successful gains.

1. Call Conversions

This is one of my favorites, especially if you focus mainly on equities trading.

Many equity traders think the best way to hedge is to buy puts against your stock to protect downside.

But you can get the same risk characteristics by simply purchasing a call

The advantage to this is it frees up a TON of cash that you can deploy in fresh trades. The downside is it lacks the versatility of a protected put strategy.

Want to “start from scratch” in your options trading? Check out my options training course at OptionFu.com

2. Directional Calendars

Calendar spreads (or time spreads) are often though of as a way to generate income through positive theta.

But a component often neglected is its long vega characteristics. So if implied vol goes higher, then you make money.

If you combine that with a bearish delta, you can benefit from direction, vol, and time decay (assuming you’re right).

The only problem with this right now is that the term structure isn’t great for calendars. This means the implied volatility is higher on mid-term options than near term, so it puts you on lower footing initially.

3. Dispersion Trading

We’re going a little further down the rabbit hole.

All this means is that you look to buy volatility on individual equities, while still selling volatility on the indexes.

A great example of this right now is $AAPL. It’s current implied volatility is through the floor. Mark at OptionPit has the full rundown.

So what would be a good example of this?

A trader could purchase March straddles (long call and long put) in $AAPL while simultaneously selling iron condors in $NDX. If realized volatility picks up, it will most likely come through faster in $AAPL.

4. Trading VIX Options

When markets go down, the VIX goes up– most of the time.

The correlation between the VIX and $SPY is about -0.8, so long volatility works well as a hedge.

Problem is, there is no “pure play” for trading the $VIX. You’ve got derivative ETNs like $VXX and $VXZ, as well as VX futures and options.

Of course, you can learn all about it in my book Timing Volatility.

One of the coolest ideas I saw came from the guys at OptionMonster’s Youtube Channel:

Did I miss anything? What do you think is the best strategy in this environment?

Also, if you really liked this post, make sure to share it with your friends on twitter and facebook!

I’m here to tell you that it doesn’t matter– for now.

Intermarket correlations have significantly dropped. While the market farts around (very technical term), individual names have been trading well.

The patterns are super clean, straight out of TA textbooks.

Will this condition last? Eventually, the market cycles will shift. But if you thought this quarter was going to be like last quarter, you’ve been in the wrong mindset to capitalize on these trades.

In this Episode of IWO Brunch, we discuss:

• The next materials sector to potentially run: $KOL
• What’s in store for $USO going forward
• How to develop a plan for shorting any pop in the $VIX
• Why the carry trade $DBV shows a better expectation of market growth going forward
• Your individual Requests

You can watch this week’s Brunch below:

On the back of the report, the stock is gapping up big into some potential resistnace levels.

With this in mind, I consider a slightly contrarian bet, thinking that we’re due for a breather in the name.

The trade idea can be found in today’s SFO Daily, and you can view it here.