Friday, May 1, 2015

Aqumin Volatility Newsletter 05/01/15 - $SDEX $VIX

Rally With Morning Coffee

We have a mild rally this morning and it is not too surprising.  The selling this week was more like someone needed to sell.  Many of the big cap names were slammed, most likely to pay for bond positions that were blowing up.  The short Euro trade must be hurting a lot of folks.  Those folks should want some juice.


The thing is the skew did not get steeper. Note the volatility surface in OptionVision™. The big bulges in IV were closer to the money and the OTM puts did not rise as fast.

The SDEX is a fairly new skew product, but is a nice indicator for steepness of skew in the 30 day cycle for the 25 delta put.  The general range is 71 for a steep skew to 61 for a flat skew.  Today the SDEX tanked to 63.31 down 1.46.  What does this mean?  Put owners were taking profits and the ATM option got bid.  Traders are looking for a move from the money not a crash to the OTM. We are getting that move this morning.

The skew should steepen again as we rally if the ATM starts to decline (rally mode). Upside call butterflies in the big indexes will look good.

OptionVision™ – data from ORATS

Read more from Andrew at Option Pit

Tuesday, April 7, 2015

Aqumin Volatility Newsletter 4/7/2015 $VIX $SPY

ATM IV melts up

Market volatility took a bit of a ride yesterday as the pre-open smack led to, what else, a rally. We got some Fed Governor news on blaming the winter but I feel like the lame jobs report was set up on Wednesday’s ADP number. $50 per barrel oil is not creating any jobs in that sector either. The pre-open action lately has not been a very good indicator of what is going to happen during the trading day.

If you look at the OptionVision volatility landscape in the SPY, IV was up per strike today even with the VIX up only .07. I expect some weekend effect but the bulge in the ATM volatility is usually a little telling. Note the slope of the yellow lines sloping up to the ATM. The demand for OTM puts declined today relative to the nearer the money volatility. Market players are expecting some movement but not a ton, what I refer to as “orbiting”. This generates day to day realized volatility but we really go nowhere. It was almost as if this rally deflated the skew a bit which is not really normal.

4-7-2015 9-25-10 AM

That leads to some upside volatility and ratio spreading again looks good. The OTM call condor or broken wing call butterflies for credits in the bigger indexes seem like the right idea. Keep the duration shorter. Place the short strike above the recent all-time highs since the bulge in ATM IV tells us the orbiting market is not finished yet.

OptionVision™ – data from ORATS

Read more from Andrew at Option Pit

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.

3-16-2015 10-15-42 AM

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