Wednesday, October 26, 2011

Aqumin Volatility Newsletter 10/26/2011 $MCD, $GE, $HPQ

Will Market Volatility cross the “Line of Death”?

With the cash VIX (CBOE Volatility Index) closing below 30 on Monday on a nice rally the question lots of pundits are asking is if we are going to break through to the low 20’s on the “Fear Index”. As for now, 30 seems to be the “Line of Death” (could not help the Gadhafi reference from the mid-80’s) for market volatility as measured by the VIX since the market can’t get past it on the downside. What I would like to do is unpack some of the individual name volatilities that make up a part of the S&P 500 and see if there is a trade or trades that fit the 30 handle inflection on the VIX. Since the VIX seems to bounce off of 30 you want a long Vega trade for the Euro Meltdown threat but also a short Vega trade to help if the Euro scene starts to normalize (we can only hope) and storm through the VIX “Line of Death” like the late, great RR.

For this job I use AlphaVision™ for Excel and Bloomberg Historical Data. I simply load data into Excel and create a Historical Time Series Landscape in the View Manager (just select the date range and hit “Create”). I am going to pick a relatively small data set of the S&P 500 using the Dow 30 stocks and layout the 30 Day Implied Volatility on the close of each day. The hard thing of course is trying to convey movement in static screenshots. Either way the dark red end of day prints show 30 Day Implied Volatility (IV30) below 25%. IV30 is the 30 day forward price of option implied volatility. Notice as you move to today’s date, the very last print, the colors change over time. That is just a different reading of the30 Day Implied Volatility data (dark red <25%, white= 50%, dark green > 75%). Prior to the USA downgrade, much of the Dow 30 traded at 25% IV30 or less as noted by the rows of dark red buildings. A sure sign of lower volatility is well, lower volatility, and about 1/3 of the Dow is getting back to more quiet levels with a bellwether name like MCD down to 20.35%

10-26-2011 9-58-34 AM

Let’s tip toe down the Time Series Landscape (below) until we see some green (50% and above IV30). The idea here is to find a name in the Dow that has the ability for IV30 to “jump”. That first name I see is GE and the current IV30 is down to 29%. GE has a substantial financial component and is now nowhere near the 62% IV30 of a few weeks ago. This probably could go a bit lower before GE interests me from a volatility point of view but it is getting close. I like to know, if the volatility hits the fan again, where that GE juice will go (look at the green spike). Let’s call this the buy side of the volatility equation and mark it. GE just reported earnings.

10-26-2011 9-59-58 AM

Now we go to the higher end of the IV30 scale (see below) and we find HPQ. The two higher valued IV30 stocks in the Dow are BAC and AA. Neither really fit with what I want here (BAC is out of category, AA is not rich enough). I want to sell some relatively higher priced IV30 to balance the potential GE volatility purchase somewhere else. 45% IV30 is not too bad for HPQ in an off earnings cycle for a 1 month trade. HPQ is down in the basement as far as stock price with a 5.5 P/E so most likely it would be selling put spreads into the weakness we had on Tuesday. The combination of bidding into IV30 softness by buying puts in GE and selling some controlled downside in HPQ would balance the “Line in the Sand” area we see in the VIX. A big move in implied volatility and the combination should be ok. Maybe even squeak out a few bucks.

Authors Note: Selling and buying options in unrelated issues will cause heavier margin requirements and carries substantial risk. Please consult your investment professional.

10-26-2011 10-01-08 AM

Tuesday, October 18, 2011

Aqumin Volatility Newsletter 10/18/2011 $HAL, $SLB, $FTI, $NOV, $WFC, $CME, $RF

What group is acting like the Financials?

There is lots of talk about correlation in this market. As in much of the traded equity world is moving in the same direction at the same time. Some blame ETF’s, EuroGloom, High Frequency Traders, Bad Policy, etc. but I think it is probably a combination of those things. On any given day since early August there seems to be only one sell or buy button and everyone jams it at the same time. So I thought it would be interesting to look at the frequency of the movement over the last week and draw some conclusions about two disconnected sectors, Energy and the Financials.

The next series of Landscape Snaps from AlphaVision™ for Bloomberg show the S&P 500 with building Height 1 Week Total Return (tall buildings are up on the week). The Color field is 10 Day Historical Volatility (HV10) less 30 Day Historical Volatility (HV30) so stocks moving with higher HV10 will show up in green and lower HV10 in red. I left the Sector plates clear so you can see which stocks are up/down and have a clear sense of the underlying volatility. Also, I arranged the plates in order of Average Total 1 Week return so the Sectors in the lower left have the highest average performance over the last week. As a reference point S (Sprint Communications) pulled up the Telecom group so that would make Energy the solid #2 performers for the week. EP (just taken over) is the reference HV10-HV30 volatility point in the Energy Group.

10-18-2011 2-26-31 PMThe Red Buildings on the top of the landscape (detail below) means that past week’s strength in Energy came on declining near term underlying volatilities. Except for a few Oil Services names (HAL, NOV, FTI) on slightly higher underlying volatility for the most part it was up, slower for this group and the #2 position for the week. I like it when a group within a group gets picked on like the Oil Services while the world just lit up for Natural Gas.

 10-18-2011 2-28-08 PM

If you hop to the back of the Landscape the low end of the scale sticks out for the Financials since it is mostly green. Here the movement has been increasing in the short term, even with what was until yesterday a solid upswing in the market. The relatively weak performance on higher (greener) underlying volatilities generally is not a good sign. Think get me out, faster. The Financials were very much counter to the declining volatilities in the market as a whole and as group I think I am going to stay away for a bit. Possibly the revenue pictures going forward are pulling things down. Either way the action is too one way.

 10-18-2011 2-30-22 PM

Going back to the Oil Services vs. the Financials thought, I don’t think the picture is as bleak as this pre-opening Landscape Snap looks for the Oil Services. HAL has not produced a quarter like the just recent since 2008 which was a record revenue year. Maybe the slap was too hard and it might be time to take another look. I can’t throw the Oil Services into the same boat as the Financials even though the market movement appears similar. I can dig that.

Tuesday, October 11, 2011

Aqumin Volatility Report 10/11/2011 - $NFLX, $S, $CLF

When Momentum Stocks Die

As an owner of stocks I just love the blowout rally that we had on Monday. The problem of course is the 1000 point drops in the Dow Jones Industrial Average just prior to this spike. I would be happy to say the Euro Zone problems are done, I cannot just yet. It looks better on balance over the weekend as Euro TARP is on the table but the general illiquidity is still a bit of a mess. Yesterday’s closing AlphaVision™ Landscape view told an interesting story, so I thought it would be worth describing. I think we saw the death of a once great momentum stock (although it had been quite sick), Netflix.

My quote screen is the view I call the AlphaVision™ Ticker (AV for Bloomberg). Height and Color are the Percent Change in Price and the Building Size is Market Cap. Also, note the chart on the lower right which is my 30 Day Implied Volatility (IV30) measure using Bloomberg Data. You can watch as many names as you want (up to 600K with the new 64 bit AlphaVision™) but here I am looking at the S&P 500. Good Euro News and “Bam!” like Emeril every stock flies. Talk about correlation. Notice that CLF was the best performer yesterday and note the volatility chart in the bottom right (Materials bottoming?). The name is peeling off of recent IV30 highs and that is the kind of momentum I want , if looking for more upward movement in the underlying. With declining IV30, the forward indicator is forecasting less movement.  I read that as some of the severe downside is taken out of the mix for this Materials name.

10-11-2011 10-17-41 AM

When I taught option trading to newbie floor traders, showing opposite ends of the spectrum was always helpful.  AlphaVision™ makes this easy because you just flip to the other side of the Landscape (see below). There lies the very sad NFLX and S.  (I will save S for another post.)

10-11-2011 10-20-34 AM

Clearly on a day when you just had to breathe to be a gaining equity, NFLX wheezed to another decline. But also note the uptick in IV30 on the chart in the lower right. The market is saying this movement is not quite done. That could screw up some call spread sellers if the IV30 continues to tick up even as the stock continues to decline. In general I would rather initiate a position after the name has shown a reversal in IV30. NFLX had a solid 18 point or so range on Monday after the nice rally in the morning and the IV30 is still on an upward arc, clearly jacked from the reversal. The Death of a Momentum Stock is an ugly thing since long holders quickly run out of reasons to own it and there is no real fundamental basis for the lofty value (see Crash of 2000). As a Momentum Name NFLX looks dead but this does not mean the management can’t pull itself out of the current (self-inflicted) tailspin. I am not ready to catch this falling knife yet.

Wednesday, October 5, 2011

Aqumin Volatility Newsletter 10/05/2010 $ZSL, $EDZ

“Juice Fatigue”

Average folks have a singular concept of market volatility. CNBC talks about the VIX (the CBOE Volatility Index) and the “highness” and “lowness”. Without going into too much VIX detail, lower VIX numbers measure relatively benign market conditions (20 or lower) and higher VIX numbers (21 and over) show more volatile market conditions. As I write this morning the cash VIX is 40.89. Quick and dirty we are at least 2x any “normal” market. But what is important for anyone who trades options is how the market is valuing that number. And this is a case where AlphaVision™ with a Bloomberg Terminal helps quite a bit.

First I a select the view with a time frame of interest, which in this case is IV30 less HV60. Here using the forward looking IV30 helps paint a smoother picture. I pick the trailing 60 Day Realized Volatility (HV60) to highlight the last two months. Note all the green in the landscape. Dark Green buildings show IV30-HV60 of at least 10 points. The building heights are 1 Week Total Return so any building standing up was up for the last week. The market is pricing most issues at a steep premium to just recent, and volatile underlying activity. I note the EDZ and ZSL as names up a lot for the week with a very rich IV30 premium to trailing HV60. I will circle back on those in a minute.

10-5-2011 9-42-16 AM

The real power of using a Visual Space is you can compare things in a broad way. The Mind’s Eye is a powerful thing. If you recall from my “Flaming Cheese” Newsletter of two weeks ago (same screenshot below) the market looked much different. You can see from the AlphaVision Landscape a Sea of Red as opposed to a Sea of Green today. Same exact market measures but liquidity providers were marking down most implied volatilities sharply. Not so anymore as they are pushing premiums up to account for more movement in the future. I see this sharp flip as pricing in a big move, most probably the Greek Default.

10-5-2011 9-43-53 AM

It is very hard for premiums to stay at this relatively high level since we are both at higher underlying volatilities and higher absolute implied volatilities. This creates a gravity pulling premium down but no one really willing to sell options because of the Euro problems. I have always called this “Juice Fatigue” (“juice” being floor slang for option premium) and it happens from time to time in our markets (just not to this extreme) and it is darn hard to make money in an environment like this. Now you know why. So you pick your spots.

Now for a close up on the star performers of the week as both the ZSL (ProShares Ultrashort Silver) and the EDZ (Direxion Emerging Markets Bear 3x) were the top performers on the 800 or so most actively traded names. The big question is do you fade the rally in both of these? Having the short term market leaders as inverse metals and emerging markets ETFs with near the most overvalued premium gives me reason for pause. How long can they keep this up? To take advantage of “Juice Fatigue” you have to be selective. Anything done in these names should be executed via spread only but key outliers are a nice place to start. Keep an eye on both these inverse ETFs and see if both the implied volatility and price sag. Maybe gravity will finally start to work (and the Greeks default and get it over with).

10-5-2011 9-45-02 AM

Authors Note: The market is very volatile right now and both of the ZSL and EDZ are 2-3x more volatile than most stocks on average. Exercise extreme caution when trading these names.