Monday, March 16, 2015

Aqumin Volatility Newsletter 3-16-15 $VIX $SPY $SDEX

Move in VIX lacked punch

The IEA came out and said the bounce in oil was only temporary. That caught a lot of the oil market by surprise as many producers and drillers found new lows today. Now we are dealing with a short term, could be long term, gut in oil supplies as OPEC puts the squeeze on competitors. That was enough to foil the bank rally Thursday. The sell-off was half-hearted at best from a volatility point of view.

Note how the IV in the SPY closed Friday. Much of the downside IV actually showed red today. That means that per strike volatility declined on a day when VIX was actually up. Another way to put it was that skew flattened on a down day in stocks.

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If you look at SDEX, which is a volatility index that measures 30 day IV on the ATM and 25 delta put options, it had a drop of .56 to 61.04. The SDEX is running in the same directions as the per strike IV, which it should. The general trend, when skew gets pretty flat and with IV in a middle tier, we should see a rally in stocks at some point.  Usually that rally will give us a further drop in IV.

A decent idea would be to sell iron condors 60 days out into this. Stick with the bigger indexes and keep the delta flat since there is usually a bit of a lag.

OptionVision™ – data from ORATS

Read more from Andrew at Option Pit

Thursday, March 5, 2015

Aqumin Volatility Newsletter 03/04/2015 $XOM $VIX

The Oil Rout Looks Like It Is Slowing Down

This was a strange day in the market when stocks really lacked a sense of direction. For the most part the tone was down and VIX was up slightly, but the volatility futures actually finished down on the day into the close. There was really a lack of interest more than anything else as the race to NASDAQ 5000 left everyone with an empty feeling.

The blighted oil patch seems to have hit a short term bottom. If it isn’t the bottom in prices it is the bottom in realized volatility. Note the OptionVision™ landscape set up where the Oil and Gas producers are in the foreground. Currently they lead the pack in the sector for the biggest average drop in HV10. Granted that was from a very high level, but volatility has to drop for a sector to stabilize, and we are starting to see that.

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The sea of red is just 10 day realized volatility trading below the 20 day realized volatility. The oil and gas sector is leading that average decline in realized vol.

I think this group is ripe for selling put spreads and short vega type trades. Oil prices can stay low for a while so pick names that are less leveraged. I have XOM highlighted as a short volatility candidate, but any name in the XLE or XOP ETF’s would do. If you decide to sell a basket of put spreads, working 10% OTM in the individual names, a downside butterfly in the XLE or XOP should hedge.

OptionVision™ – data from ORATS

Read more from Andrew at Option Pit

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

Read more from Andrew at Option Pit