Friday, February 20, 2015

Aqumin Volatility Newsletter 02-20-2015 $SPY

A Reversal of Risk

It looks like the Greek Drama happening overseas ended up being a comedy more than a tragedy. That is good for investors and good for the Greeks. We will revisit the issue in June but for now that looks like the only thing that was holding up implied volatility.

The OptionVision™ landscape shows an interesting pattern for change in the term structure in the SPY. Essentially the back month terms are dropping in response to the ECB/Greek news but the near term upside is catching a slight bit. This means market participants are looking for IV to drop in the long term but are still wary of a move to the upside in the short term.

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I don’t blame them. Stocks have had the wind at their back since the low rate regime set in around 2009. The slowness in Europe gave the Fed a reason to wait on the rate hikes and stocks will love that. That is what the end of day term structure says today. Index Iron condors look like the rage again since most of the news is out. Go 60 days out to catch the last gasp of volatility in the market but keep the deltas flat.

OptionVision™ – data from ORATS

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Monday, February 2, 2015

Aqumin Volatility Newsletter 02/02/2015 - $SPY $SPX $VXX

Orbiting Volatility

Stocks ended the week in an ugly fashion with the SPX down about 1.25%. There was enough in the bad sentiment train with Greece, Euro Area deflation, poor GDP and Russia annexing another part of the Ukraine. Not the stuff of rising markets with earnings only tepid this season. So far most companies that are reporting are doing better than estimates. Not 80% to blow it out but just ok.

Note the OptionVision™ IV landscape from Friday. There is not a hint of skew shift anywhere in the picture. Implied volatility is up across the board but the skew curve in the SPX did not change much. To me that is more of a signal of higher “orbiting volatility” than outright crash time. If traders were worried about a crash they would be bidding up the skew. After Friday there is a bid for near, at and out of the money options.

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The persistent realized volatility is coming from two places: most things happening in the USA are good and near everything in Europe is bad. That gives us the 1% rallies and the 1% selloffs. The Greek pullout means the selloffs will be a bit more frequent than the rallies until there is a settlement, whatever that might be.

The trade is buy the dips in IV using a product like VXX. Use near the money time spreads for the high positive theta and keep the long month in March since it will cover the Greek negotiations. I think any time spread that buys March will pay to some degree as long as you can manage the gamma.

OptionVision™ – data from ORATS

Read more from Andrew at Option Pit

Friday, January 16, 2015

Aqumin Volatility Newsletter 01/16/2015 $XHB $KBH

More Volatility for Homebuilders

We are finishing a volatile week for global markets and it most likely will stay that way until the ECB comes up with some announcement on Jan 22nd and/or the Greeks decide to elect a new government by the end of the month. Earnings reports so far have been mediocre and without the promise of domestic QE, stocks have not been able to recover. Short term, things will stay choppy.

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Once again I have Homebuilders leading the realized volatility averages (foreground). Oil and Gas Explorers and Producers are showing the largest relative decrease in realized volatility (back left corner). I don’t know if this is the end of the drop in oil prices but at least it is decelerating. The group even had a few stocks up on the week which is a nice showing relative to the S&P 500. The group is worth keeping an eye on now but I don’t expect any grand bounce.

Rates in the USA continue to tick down. Why? It seems we are the only one of the big 3 tradable economies in the West that are bothering to pay interest. Germany and Japan are at or near 0. That should be good for housing as current reports have huge numbers of home refinancings.

A trade that could work would be to take advantage of KB Home (KBH) crush and sell a just in the money put since this name has already led the Homebuilders down. Hedge with buying a put of same duration, but less money, in the Homebuilder ETF (XHB).

With volatility so high everywhere one needs to be careful. The last time we had Homebuilders leading in relative RV it made a power move up. Past performance does not guarantee future results, thus the slight hedge given our ugly market.

OptionVision™ – data from ORATS

Read more from Andrew at Option Pit