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.

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