Wednesday, November 30, 2011

Aqumin Volatility Newsletter 11/30/2011 - $AGQ, $ZSL

Is the market cooling down?

With Aqumin being based in Houston, I thought it would be worth mentioning that the WSJ this morning reported that the USA is a net exporter now of petroleum products for the first time in 62 years. I think that is a big deal, especially when the country is looking for symbols to pull everyone out of this anti-capitalist fog. If we could just tackle the budget issues with the same ingenuity that we now use to look for and find oil with we would be off to the races again. One can dream… The good Petrol news is one more long term reason to be bullish for sure, but unfortunately we are saddled with the volatile here and now in Europe, despite the best efforts of our native Oil and Gas Industry to right the ship. Some interesting things are starting to take shape in terms of short term underlying volatilities so let’s see how they play out in the AlphaVision™ Landscape.

One of my favorite AlphaVision™ for Bloomberg Landscapes (below) is the HV10 less HV30. Simply put this landscape reconciles the previous 10 Day Historical Volatility (HV10) with the previous 30 Day Historical Volatility (HV30) of the underlying. The landscape answers the question is the stock or ETF moving more or less over the last 10 days than the previous 30. In a volatile market environment this is important when you want to manage, say, how many calls you write against an equity portfolio. Also, I like to use this to point a direction at the broader market indexes. Are we cooling down (red) or heating up (green)? Red stocks have the HV10 less than HV30 with dark red names trailing by at least 15 points or more. As you can see below there is a lot of red and this would indicate (and confirm of late) the decline in broader market implied volatilities.

11-30-2011 9-34-26 AM

Besides the broad stroke in color, the building height is just 1 week total return for the context of a big move. Note a lot of the accelerating (green) buildings are taller or shorter to indicate extreme movement in either direction. There were only two dark green buildings in the ETF group trading over our soft screen of 15 points or more (remember the breakthrough screening technique with AV is to display above and below screened values to let the data show through). Funny enough they were the AGQ (ProShares Ultra Silver) and ZSL (ProShares Ultra Short Silver). The AGQ was sold down particularly hard (see close up below) showing HV10-HV30 at 30+ points.

11-30-2011 9-35-34 AM

From the perspective of any real moves by the big central banks (read inflation) the recent lows for the silver names seem a bit overdone. What you can ride is the accelerating underlying volatilities for more short term contracts in the AGQ (that has more bang for the buck) for a snap back. When you stretch the rubber band they tend to snap and I think the short term implied volatilities in AGQ are no exception.

Authors note: Leveraged ETF’s are volatile underlying securities and traders should use caution and spread type activities when looking at their related option products. Contact your investment advisor before initiating such trades.

Tuesday, November 22, 2011

Quoted market data comes of age

Short history-

Market data has been around as long as there has been a market. The Egyptians were using wet clay blocks to quote wheat future prices thousands of years ago. The big uptick in disseminated market quotes was the printed newspaper as soon as they invented the printing press. You could read about your daily tulip bulb prices in the Dutch Gazette in the early 1600’s. Things pretty much stayed that way until the telegraph and the advent of the electronic ticker in the 1800’s. From the outside investors’ point of view this was really the first access to the market intraday and “reading the tape” became part of the investing lexicon. Television screens came along in the guise of the Quotron terminal and now market data had a blinky, real time feel. That Quotron was still around on exchange floors until 2000 or so even when the PC (real time quotes, charts and spreadsheets) had near completely taken over for trading screens. While the markets change very fast, you will notice how slow quoted market technology changes.

Market Data Structure-

What has changed very fast over the last 20 years or so is speed of access to exchange ticker plants. It was not the quote per se but the access to it. The electronic pipes are there for everyone but some data infrastructures are bigger than others and that gives a microsecond lead in getting a quote. The Algo (programmed, automatic execution) and High Frequency Traders (HFT) now drive a large part of that order flow. And there is a continued race for speed which I will assume will end when all HFT’s can receive quotes at the speed of light. It will go back to being better instead of just faster. The problem with all of this technology is that the exchange liquidity has become fractured. As a result, we see more volatility and less concentrated liquidity except in a few markets. If market data tools are going to evolve they have to quote more information than just an uptick or a downtick.

Besides speed to market, the biggest evolution in the last 10 years is the proliferation of indexes and ETF’s and ETN’S. In general, these securities pull together like instruments to make market access easier for the trading public. The flip side of course is the markets will start to move closer together because the ETF managers have to buy and sell like securities in bulk to keep up with demand for their products. You want to trade the S&P 500? There are probably 2 dozen+ different ways to go about it- long, short, leverage, inverse leverage, you name it. The reality is that there are only the 500 names and product demand makes them mover ever closer together. If you want to find an edge, you want to see what is not moving with the market these days. Traders need their quotes to tell them more than position, they need relative position.

What is a 3d market quote?

With the advent of the various market factors of speed, fractured liquidity and increasing correlations the idea of a market quote in context makes more sense. These factors have always been in play over the last 20 years to some degree but now, as they act together, the impact feels greater in an upswing in market volatility. What is the context of a move in an individual name with the swirl of market forces around it? What is a 3D market quote?

First to describe a 3D market quote you need to understand what that represents. Below is an Aqumin Landscape using Bloomberg Data (any data point in Bloomberg is available to configure the space) to describe several real time market data points acting at once. Obviously you notice the “city blocks” with the “buildings” in each block. Each block is a user defined grouping like a GICS Sector and each building is a security which in this case is an equity or ETF. The next thing you notice is the Heads Up Display (HUD) to convey the actual market quote in the black boxes on top of the Landscape. The next, new landscape features are building colors, heights, sizes and positions. These landscape functions provide the relative relationships of the quoted data within the entire market place. You can pan, zoom and rotate in a fully interactive space. I will go into this in detail.

11-22-2011 1-30-24 PM

Height: Price to VWAP -1 this is just a simple metric that shows when a name is trading above or below the Real Time VWAP during the trading day. If the building is up above the horizon (plate), the name is trading over VWAP. If the name is close to the plates (horizon) it is about to flip VWAP position. If the name is under the plate, it is trading below VWAP. This is a relative position comparing one name with all others.

Color: Percentage Change in Price a simple representation of if the stock is up or down on the day. Green is up, white is flat and red is down on the day. You can add or change colors to create more granularity of the view. Also note that any deep (red or green in this case) color represents an ‘alert’ that the name has passed a certain threshold. This is a relative position comparing one name with all the others.

Order: Market Capitalization the relative size of each building is comparable with other buildings on one plate. Bigger buildings have bigger market caps and smaller buildings have smaller market caps. Also notice the position of each building. They shuffle and re-order in real time to push the bigger ones to one corner and the smaller ones to another corner. This is like having a quote screen with 1500 names constantly resorting for what you want to look for.

Now click on a name that catches your eye and what happens?

11-22-2011 1-32-30 PM

Since the space is interactive, you pull up a Bloomberg Chart when you click on a name and you now get a sense of what you are looking at. You have a last tick representation of a real time chart relative to all the other names. In the case above WAG (Walgreens Inc) was down on the day most (redder) for any name in Consumer Staples but not trading at the lowest level relative to its VWAP. Essentially it is starting to bounce a bit like the chart suggests. Since it is not Dark Red (an alert limit) the landscape is simply telling you that it is approaching that level. An Aqumin landscape view like this is built for momentum traders to help identify inflections prior to an alert. The 3D quoting space simply sets up an opportunity that would be near impossible to screen for. This makes the quote screen work for the trader since you just look at it and can sense unique action.

Broad quoting of volatility data

Having one view would be useful and that is how most (if not all) quote screens are set up. When you have an interactive space, you can change it on the fly and look for something else. In the sample below I want to look at a broad view of volatility data. We use the same setup for Sector plates but now we want to quote the difference in 30 Day Implied Volatility (IV30) versus the trailing 60 Day Historical Volatility (HV60). Now I use building height to show 1 week Total Return for a context layer to the volatility differentials. If a building is red, the forward IV30 is trading at a discount to the prior HV60. If a building is green, the name is trading at forward premium. So what do you do with this?

11-22-2011 1-33-46 PM

In this case of about two weeks ago the market was signaling lower volatilities moving forward based on IV30. The absolute level of current IV30 is sufficient to price the moves forward. Even with the market going south from the Euro Issues on the week of November 14th the VIX actually declined. In this case the Aqumin Landscape was a predictive indicator when looking at Broad Quoting Relationships offered in the view. The idea here is not just reading a chart but looking at many charts at once to come to conclusions about market volatility behind the broad indicators. The movement behind the movement is now possible with better a better way to view the market.

Looking for opportunities

What we have now is a new way to make decisions with the market data we already have access to. The uses moving forward are really two fold for this type of quoting technology:

1. Find the chart or name that looks interesting out of the sea of market action. That name should come to the user.

2. Use the aggregate of quotes in context to make assessments on the relative market indexes (like the VIX) or ETF’s based on the underlying group of securities that make up the larger bucket.

As traders we are always looking for edge. The high speed area of the market is in a high stakes race for technological superiority that most of us just watch. By reorganizing market data in visual space traders can wait and look at the wreckage to see if anything is worth doing. Much better to wait for opportunity then get run over in race beforehand.

Wednesday, November 16, 2011

Aqumin Volatility Newsletter 11/16/2011 $AAPL, $NLY, $AGNC

Are Financials still leading the way?

Headline news this morning has the Super committee in Congress already looking to fudge their debt reduction pledges. Maybe they don’t have CNN and are not watching what happens to countries when they don’t get their house in order. Two leaders in as many weeks were brought down by the bond market. Yes, that is right. Not by voters, but a bond market that is flexing its muscles. Sort of like the Arab Spring for Euro Leaders addicted to debt. Congress can change its mind (one can hope) but I think you can see the unease in the equity markets. Let’s look at some individual volatility for the most active Equity and ETF option classes.

First I have a wide view of 30 Day volatility in the AlphaVision for Bloomberg Landscape. Any name in dark green is trading over 40% 30 Day historical volatility (HV30) in the underlying and dark red is under 20%. Building Height is HV30 also to add some granularity to the view. Building footprint is market capitalization. You should see fatter buildings tend toward red in color since higher market cap stocks tend to trade at lower HV30’s. Note the relatively higher HV30 for AAPL in the lower left corner.

11-16-2011 9-41-30 AM I use 40% HV as a soft screen indicator. When the market is more benign most of the bigger market capitalization stocks trade around 20% HV30. 40% HV is a double and good place for me to review broader market activity.

11-16-2011 9-43-24 AM

Just zooming in to the Financials and Materials (gold and miners) I see very few stocks with lower HV30’s. Both of those Sectors really show the strain of what is going on right now. Normally I see more red in both those (lower HV30) and I am seeing almost none now. Before I can believe any rally in the overall market, these colors have to change to at least light green. Financials and Gold Miners need to become somewhat boring and that is just not the case. In the Financials, there are just a couple of high yielding REITS (NLY and AGNC with current dividends well over 10%) with lower HV30. These REITS were trading at 40%+ HV 30 at the height of the crisis this summer and have come back a bit. Now that the Fed has signaled lower rates into the future these might be worth a look (I own NLY in an IRA) at a very depressed price (think stock with a collar for now). They are trading cheaply and I think a big part of the reason is the instability in the bond market. The bond market has already shown its willingness to push for change; I just don’t want it to happen on this side of the Atlantic.

Wednesday, November 9, 2011

Aqumin Volatility Newsletter 11/09/2011 - $EUO, $SMH

Italian Bonds a bargain at 7%?

As the markets open this morning with things looking lower we cannot seem to get away from the headline news. Italian Bonds cleared the 7% hurdle now so they look to be on a path toward unsustainable interest payments in the future. I think most investors in the debt world are worried about what they are going to get for what they own now. You think the Super Committee is taking note of this as we plunge inexorably toward the same sovereign debt structure as the PIIGS? Great, we can be just like them. The market did seem to signal this so let’s take a look at the AlphaVision™ Landscape for the close on November 8th, 2011.

Originally I was looking for positions to sell options in. When I open up the AlphaVision™ for Bloomberg Landscape I saw something I don’t normally see. Color in this case is 30 Day Implied Volatility less 60 Day Historical Volatility. All the red you see below are stocks that have December volatility trailing the underlying activity of the last 60 Days. As you can see most of the active option classes are red and I cannot sell too many options into that. But I think this is telling us is that options are pricing forward movement lower than the past two months. 7% yields in Italy or not, the market is pricing lower implied volatilities.

11-9-2011 10-14-30 AM

The close up below is of the SMH (Semiconductor HOLDERS ETF) and EUO (ProShares UltraShort Euro ETF) ETF’s. Note how the market is pricing almost the entire ETF complex for a slowdown (read red) in Implied Volatility. The top two that bucked the trend (Dark Green) are the SMH (which I discount because of wide markets) and the EUO for higher volatility looking forward.

11-9-2011 10-15-51 AM

The higher EUO volatility differential rightly thinks the Euro mess is still rolling but I think we start to see less effect on US Equities than over the last two months as the real exposures to this mess unfold.

Wednesday, November 2, 2011

Aqumin Volatility Newsletter 11/01/2011 $FAS,$FAZ,$ERY,$TZA

Buying PIIGS Sovereign Debt is like what?

One of my own favorite posts lately was “Flaming Cheese”. At that time I was looking for trades as the whole Euro mess started to cool. At this point I have lost count on how many times the market has taken the Implied Volatility straight up only to crush it back down a week or so later. This is easy money, right? Well maybe not that easy. Just ask the guys on the prop trading desk at MF Global. Down goes another firm but the market really did not care much. I think that loading up on European PIIGS Sovereign Debt right now is like selling Implied Volatility at the bottom. Sure you have a chance to win but you can get killed by the swings in the meantime. Let see how the current short term Implied Volatility scene plays out in AlphaVision™.

Below, my AlphaVision™ for Bloomberg Landscape is monitoring 10 Day Implied Volatility (IV10) less 30 Day implied Volatility (IV30). If there is a spike in near term Implied Volatility the building (a stock) is green and my target value of 15 points over registers in dark green. Any name showing a decline registers in red and dark red for 15 points or more to the downside. Building height is One Week Total Return (up is positive) to give the volatility moves a frame of reference. We see a lot of green as the market took the great Greek bait and switch in a “not so positive” way. I left the sector plates clear so you can see the short term moves in Implied Volatility in the 800 or so most active names. That action was nearly all up.

11-2-2011 11-07-44 AM

I adjusted the plates to opaque, so we can focus on the dispersion of names on the “up” side of the landscape. There are still plenty up after two good days of selling.

11-2-2011 11-10-13 AM

I do like poking around the ETF’s for signals. While most of the market has higher shorter term (read Weeklies and November) implied volatility over the last couple of days, the opposite ends of the spectrum in the ETF’s were interesting once I checked them out. On the big volatility pop I see the TZA (Direxion Daily Small Cap Bear 3x), FAZ (Direxion Daily Financial Bear 3x) and FAS (Direxion Daily Financial Bull 3x). The one strange thing was the FAS showing up 36% for the week which I think is a data error and should be flipped down (more like down from $16+ to $12.56 for the week). With such a big move in that in both IV and absolute terms I am looking at that name to start overreaching on the downside. On the other side the ERY (Direxion Daily Energy Bear 3x) was showing just lower 10 Day Implied Volatility from the IV30. The name is climbing out of the basement so no real surprise the IV10 is drifting lower than the IV30.

11-2-2011 11-11-42 AM

Overall my takeaway here is to wait. I don’t see much that is conclusive except the financial ETF’s (and by proxy financials) probably overshoot Implied Volatility levels in the short term on the Greek Referendum news. If the referendum is in January the short term picture should start to fade a bit and it might be better to wait to jump on the decline in IV10. As opposed to MF Global, waiting will get you better prices for the short premium positions so don’t take the bait quite yet.

Authors note: Leveraged ETF’s are volatile underlying securities and traders should use caution and spread type activities when looking at their related option products. Contact you investment advisor before initiating such trades.