“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.
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.
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).
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.
Posts
No comments:
Post a Comment