Stuck in the Middle with You
Why can’t I get the song “Stuck in the Middle With You” by the band Stealers Wheel out of my head? I wasn’t even around when it was popular, and I don’t enjoy the rest of the band’s music, but it still hums in the back of my mind during the trading day.
It has a lot to do with tail hedging.
Skilled option traders select trades based on market conditions. If implied volatility is depressed, calendar spreads have a good risk reward payoff. If implied volatility is expensive, a butterfly spread might make sense.
Placing bets on tails, the large and rare moves in the market, require strategies that are a little more complex than simple butterflies or calendar spreads.
Why?
Stealers Wheel
This gets back to my Stuck in the Middle with You affliction. The stock market has a lot of quiet times, it’s stuck in the middle a lot. Large movements in prices are rare. In fact, the Covid 19 crash was one of the few large price movements in history.
If this was a Stealers Wheels song, this might be called “Moving Rapidly Away From the Middle With You.”
Best,
James
