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.

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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.

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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.

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