“Flaming Cheese”
Back in the 1990’s when I was a floor trader on the CBOE many a celebration was held at Greek Islands on Halsted Street just a hop away from the exchange. As soon as you get there the waiters would fly in with bottles of Retsina and plates of Taramosalata (we called it “Fish Whip” and it is delicious) and Saganaki (“Flaming Cheese”). It was (and still is) a great time with great food swapping stories of big wins or crushing defeats. The Greek Default problems are like my plate of flaming cheese in the old days, once very hot and now starting to cool. Let’s see what the recent cooling off looks like and if there are any tasty bites.
The key here is picking the right time frame to examine. I choose a simple landscape of IV30 (the forward looking 30 Day Implied Volatility) less the HV60 (the backward looking 60 Day Realized Volatility) for Landscape Color and Order with Landscape Height 1 Week Total return. This way I can see if a volatility opportunity is bound to a recent move. The AlphaVision™ Landscape above is mostly a sea of red (around 70% or so) for the most active 800 names that trade options. This means the liquidity providers are forecasting lower volatilities going forward than the last 60 days. No surprise but still it is a substantial part of the market for equity and ETFs. Simply, the forward looking volatility is trading at a discount to the realized volatility of the last 60 days. While that is the trend in red, I want to explore a couple of the names in green (which means forward IV30 is trading at a premium to the HV60 over the last 60 Days). This is the “Hot Cheese” on my plate.
First I zoomed into the ETF’s since I saw so few dark green names. My hard cutoff was 10 points over (IV30-HV60) but as you can see AlphaVision™ screens for all available names. I kept it to stocks just moving up over the last week since I wanted to take sudden drops out of the picture. First up (on the upside) is the EUO (Proshares UltraShort Euro ETF). The market is saying the name is going to move more than it has in the recent past. With the Euro Zone a mess, I cannot disagree. The next name was the GLL (Proshares UltraShort Gold ETF). This name has popped up in different guises in my past blogs. First the GLL was super cheap (volatility-wise that is) then the realized volatility exploded (two + weeks ago) and now the market has gone full circle and is pricing the IV30 at a premium to its last (very volatile) 60 days. This is now in the face of gold not making new highs anymore. While I am sure we have one more spike in gold at some point when Greece finally caves and defaults, it does feel like the big upside is starting to come out of the picture and paper is driving up the price of options in the short term for this inverse gold contract (GLL). Maybe a short term, short put spread-type play is in order here (maybe even a covered call since GLL is so close to its 52 week lows). This is either a trade small or add to watch list situation (you could wait for the spike and fade the move then), but the October cycle looks like an opportunity. But you should understand this contract is priced like this for a reason (meaning risky). If we get more of the same wishy-washy action out of Europe, look for this GLL premium to compress in the short term. Much (but not all) of the “flame” is off of the Euro “cheese” plate for now, except in select locations. OPA!
Author’s Note: Inverse, levered ETF’s need special care for risk and require special margining. Consult your investment advisor before making any such transaction. If you don’t understand it, don’t trade it.
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