Tuesday, March 6, 2012

Aqumin Volatility Newsletter 03/06/2012 - $SNDK

Dusting Off the Old Crisis

The sell off today is just another round of the Greeks messing with everyone’s mind. No wonder the Romans ran over them back in the day. This crisis still has legs (albeit shorter legs) and the volatility markets were pretty severely bid even though not much was happening in the underlying volatility markets. How can you tell that?

Take a look at the AlphaVision™ screen below that measures 10 Day Historical Volatility less 30 Day Historical Volatility. Much of the red you see means that the 10 Day Historical Volatility is trading under the 30 Day Historical Volatility. In layman’s terms that means most of the market was grinding to a halt. Also note that much of the 1 Week Total return was below the landscape horizon (negative). Most of the downside green spikes were stocks that have just gapped lower this past week.

3-6-2012 3-49-22 PM

The Greek Debt timetable is pretty well known, but the story seems to have changed drastically today, at least that is how the equity market reads it. Most of today’s move was priced into the volatility indexes even as the underlying volatilities (all the red buildings above and below) were not moving much before on balance.

I think the play with the mini-crisis is buying option premium in relatively low volatility names right now. If, as I expect, the EU pushes this debt swap through things will feel a bit buoyant again and most of the IV in name stocks is at or near 52 week lows already. From a risk point of view it is probably not worth fading the crisis yet, better to buy options that are already in the bottom (much like Greece’s economy). Look at names like SNDK that were already in the volatility basement and see if buying the future movement is worth the price. If recent history is any guide, this might be just the first shot.

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