Wednesday, July 23, 2014

Aqumin Volatility Newsletter 07/23/2014 $SPY

Someone wants the upside

This kind of reminds me of the anticipation before walking on a trading floor some mornings. Something is going to happen but you just don’t know what. The first instinct is to raise the bid in the options a little bit and do some price discovery. The corporate earnings news and economic data has been pretty good lately so the heebie jeebies are not there.

Then there is the Ukraine and Gaza that is setting a sad back drop for a mostly rosy market picture today. The rule I learned early is the market hates uncertainty, and there seems to be something behind door number 1 or number 2 but no one really knows what it is.

7-23-2014 3-24-00 PM

Note in the OptionVision™ landscape above, where the skew is catching a bid today that is mostly on the upside. The SDEX which measures downside skew is down on the day as the ATM options are catching a bid and the downside volatility is fading. This feels a bit like price discovery to me. The upside is lurking as it has so many times this year when traders least expect it. That is what the feeling is like right now, if we can get past the issues on the other side of the Atlantic.

Use the skew and buy upside Broken Wing Butterflies in the indexes for credits 2 weeks out. Set them for max benefit on a $200 SPY. If the geopolitical stuff gets ugly, keep the credit.

OptionVision™ – data from ORATS

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Monday, July 7, 2014

Aqumin Volatility Newsletter 07/07/2014 $SPY

Who killed the volatility?

That is the question I am asking myself. I show IV now in the 6 handle for OTM calls in the SPY. This is on top of the SP 500 moving into record territory again. We are moving into the realm where the upside is so cheap no one wants to sell it anymore. Fund managers looking for extra yield are going to start selling calls in stocks if they cannot get the dollars they want in indexes.

7-7-2014 8-37-37 AM

That might set up an interesting trade going forward. We will see very high skew for the foreseeable future. Cheap calls and relatively expensive puts might bring buying upside options into the realm of possibility again. One of the great things about bull markets is that traders can buy calls or upside skewed long premium and actually make money. The calls are just very cheap. We might see this for some time.

I think index double calendars are going to work well. Look for at least flat term structure and skew flat to long. The trade should work into the July earning cycle.

OptionVision™ – data from ORATS

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Friday, June 27, 2014

Aqumin Volatility Newsletter 6/27/2014 $AVP $COTY $VIX

The Avon lady is calling

A dead day is a dead day. And today the market is living up to its low volatility number by putting in a .14% drop. That is hardly enough to register on the VIX-o-meter. Any little blip in activity stands out more on a day like today.

Note the activity in the AVP Aug 13 puts on the OptionVision™ landscape below. Paper bought a big block of puts and most likely this was tied to stock. As we move forward earnings are usually on the 1 day of August in AVP. This is pretty early in the earnings cycle to buy a big chunk of juice.

6-27-2014 1-51-51 PM

AVP has not done much lately. A couple years ago they were the object of desire for COTY in a buyout attempt. The level of the buyout was much higher than AVP is now. I don’t think AVP makes a bad buy write here on the Aug 8 Weekly 14.5 calls. It should yield around 5% and it puts you into AVP near the lows of the year. Of course if COTY comes around again you don’t get the big dough for the takeout.

OptionVision™ – data from ORATS

Read more from Andrew at Option Pit