Wednesday, April 28, 2010

Greece is the Word……

That catchy line from the movie seems to describe the change in action on Tuesday.  I have been writing over the last month about risk in general (VIX and CDS spreads) and there was an undercurrent of pricing that seemed to foreshadow movement when there wasn’t much during the time.  The Sovereign Debt problems get headlines. Credit Problems get headlines, even for relatively small countries like Greece. Big Credit Headlines can crater the stock market as everyone now knows.  What is market action from the headlines?

Since it is Earnings Season, I wanted to look at the stocks that have already reported to get a sense of the volatility and movement action outside of earnings. I wanted to take the earnings announcements out of play (that is another level of complexity for another day).  Market drops like yesterday’s usually open up an opportunity in option volatility.  The landscapes you see are filtered for companies that have reported this April.  First I looked at the Financial Stocks, and many of the big names are trading close to their 1 month lows (Right)- JPM, CS, DB, BLK, NTRS, GS (The tall red buildings in the front).  At the same time I wanted to look at 10 Day Put Implied Volatility (IV10) versus the 60 Day Historical Volatility (HV60) (Left) to look for overvalued options after all of these down moves.  I am looking for the IV10 to be at least 30% above the HV60 to consider selling any options in the short term.   The Credit Issue with Greece (is this the second or third time this year?) makes me want to keep track of these names a little more closely since the Financial Stocks get the early brunt of the action.  Let’s see if anything pops out.

Volatility and Price MultiView 

This morning with better news on Greece, the financials are all up.  My idea of this decline being more news driven seems to play out.  I also wanted to see a bounce.  The Big Financial names are showing a little pop as of this writing.   I see JPM as a bit of an outlier in terms of the 10 Day Put Implied Volatility versus the 60 Day Historical Volatility (IV10 is 1.3x HV60) in the Big Financials I was watching.  The combination of close to 1 month lows and more advantageous Near Term volatilities makes the Out of the Money Put Spreads (42/40) in May look like a good choice to pick up the next bounce.  For Investors interested in a quality financial name (JPM) at a relatively good price this is a good time to take a look.

The opinions expressed by the author are his alone, and do not reflect the opinions of Aqumin LLC, its shareholders, partners or affiliates.

Thursday, April 22, 2010

Is the News Sentiment improving for Goldman?

The bad news surrounding Goldman Sachs (GS) right now reminds me of when the Bank of England said they would support the Pound and George Soros bet that it would crater.   Someone was right and someone was wrong and there was a bit of noise afterward.  Successful traders see something where others don’t and then they act.  How many Wall Street CEO’S got canned for loading up on Sub Prime Securities?  It was fashionable to leverage a balance sheet for the easy carry trade in 2006.   A few successful investors saw this as unsustainable and bet against it.  Now Goldman is in the hot seat for facilitating a trade (bringing together a buyer and seller) when there were plenty of buyers of subprime securities at the time.    The news has been bad for GS in the short term and the system will take it’s course. In the meantime, let’s analyze the news since last Friday and see how that has effected option volatility for GS.  

GS Single Plate 
Above:  Each building represents a News Story as an item, so  you don’t have to sift through the news, the News Sentiment Scores from RavenPack when displayed in AlphaVision do that for you.  The tall, purple stories (Very Bad News Sentiment, High Market Impact Score) are the initial wave of bad news about the SEC investigation 5+ days ago.  Notice as you move to the lower left (closer to today) the subsequent Bad stories had less impact (shorter, purple buildings) and then the news turned to Neutral and downright Positive (green) because of Earnings and Revenues.  The flow of “new” bad news has slowed to a trickle.  What does that mean for the options?

At first on the big down move, the Implied Volatility in the options leapt last Friday.  No real surprise and it has been well covered.   Looking at the Option Landscape above as the week progressed, better news meant lower option volatilities by April 19th.  Taking a snapshot of option market activity at the end of the day, Red Buildings mean declines in Implied Volatility in the 2nd Month (Next Term) Puts (there was a one strike exception).  With this view representing mostly Out of the Money Puts , the decline was pretty consistent and shows a reduced perception of risk from the day of the SEC announcements to today.  The markets are digesting all the available information.  The effect of better news about GS is starting to push the volatility back down from its recent highs…at least for this week.

Monday, April 19, 2010

Is Risk Declining Everywhere?

To answer that question first I have to describe the risks.  For this case I will use the Credit Default Swaps (CDS) Spreads  and Implied Volatility in option prices to help me.  These two derivative markets reflected the story very well in 2008 and 2009.  There is too much information for any person to watch all at one time, even using multiple screens.  I wanted to create a market view to show many risk factors at once.  Since the Greek debt crisis becomes an on again/off again headline, I was curious to see how that is effecting the optionable universe of names I follow.  For my sample I will proxy Credit Risk by the Percent Change in 5 year CDS Par Spread. If the market sees more credit risk those spreads go up.  If the market sees less credit risk, those spreads go down. 

CDS View 4-19

This View looks at Percent Change in 5 Year CDS Par Spread, and the difference between 12 Month Implied Volatility 6 months ago and today.  What these different data points create is the scene 6 months ago (prior to Greece in the post Meltdown recovery) and right now.    The risk, measured by 5 Year CDS Par spreads, is going up in the lower volatility names in the Equity Universe that trade listed options.  Those lower volatility names (short red/purple buildings in the front) are the more Blue Chip companies- I highlighted DELL, HPQ CSCO, IBM and MO.  The higher volatility names (taller, green buildings in the back) are showing marked declines in risk.   There looks to be two faces, one for lower volatility companies and one for higher volatility companies.

In General:

- CDS spreads for less volatile stocks have gone up in the last 6 months. 

- CDS spreads for the more volatile stocks have come down.

The ongoing Greek situation (remember 1998?) seems to be spilling over to the quality end of the corporate credit risk market.  Traders are assigning more risk in the higher quality names of the CDS market even when the implied volatility in the equity market is steadily driven down.

It takes only a few minutes to construct these views in AlphaVision (I could not do this in a spreadsheet).  Data provided by Bloomberg.

Friday, April 9, 2010

Getting Behind the VIX – a New Look

Vix with Logo

During  the recent market run up, the VIX  has dropped to new lows of the year (just around 16+).  The VIX is a 30 day forward look at the Implied Volatility of the  S&P 500 Index Options (SPX) and a popular sentiment for market volatility overall ( .  My quick and dirty indicator is as follows- Boring Bull Market VIX is 7-13, Internet Bull Market VIX is 13 -20+,  Panic VIX is 30+, Near Financial Collapse VIX is 75+, 1987 Crash VIX is 100+.  Right now we are not really in any of those general categories but the hangover of the Credit Crunch is alive and well (not exactly a Boring Bull) with the market making highs for the year.  Does the VIX look likely to continue moving down?

Let’s look at the  individual components of the S&P 500 with earnings season in full swing.  In AlphaVision, I set up a landscape of the S&P 500 with a ratio of the At-the-Money (ATM) Near Term Implied Volatility/ HV10 (10 Day Historical Volatility) to compare Implied Volatility (of the options) to Historic Volatility (of the stock).  Green buildings have the option volatility trading a premium versus a 10 Day Historical of the individual stocks.  Diagonally moving across the landscape from left to right  the degree of overvalued implied volatilities start to decrease (the landscape gets less green and more red) and the underlying stocks are moving more than the Implied Volatility of the options would suggest . 

From this View, most (70%) of the Near Term Implied Volatility looks overpriced relative to the movement of the underlying stocks in the S&P 500 and probably reflect earnings season.   CPWR, for example,  has an ATM Near Term IV of 56 but only a HV10 of 12.   Any sign of a benign earnings season will make those extra premiums (and the VIX) come down closer to  where stocks are actually trading.  Stocks in the S&P 500 have to move a lot to support the way traders have the options priced right now.


To request a custom analysis of market data using AlphaVision, please contact Aqumin at

Thursday, April 1, 2010

Riding the Wave of Positive Sentiment and Momentum

MomentumNewsSentiment  Are there different ways to show Momentum in a stock?  Consider the amount and quality of News Sentiment in a stock that is moving up. Best Buy (BBY) recently is leading all Retailers in the quality (top 4) and quantity (number 1) of News Sentiment on a 1 week moving average (BBY is near the top of retailers in News Sentiment on a 1 month Moving Average-not pictured).  Notice in the large market view (Above: News Sentiment-All Industry Groups) that BBY, has one of the highest positive sentiment scores for a company with a large volume of stories across the entire market (big green buildings in the lower left hand corner of each Industry Group)Is it too late to ride the wave of Positive Sentiment and Momentum?

Now compare the recent price movements to the rest of the Retail Industry Group ( Below: Ratio of Current Price to Price Performance and 6 Month Price Chart).

Ratio Current Price Performance 

Dark Green companies lead the Retail Industry group in trading above their 50 Day Moving Average.  Our Sort shows BBY is still in the top 3rd.  Also note that while the performance of BBY was positive over the last month, it does not stand out as getting ahead of itself. The Halo Effect of having iPads in Best Buy, while reported, has not yet been reflected in the stock price.  My take is that at 13x earnings there is room for BBY to run.

For a Sentiment Analysis of a Portfolio or Industry Group using AlphaVision, please contact Aqumin at