Friday, October 26, 2012

Aqumin Volatility Newsletter 10/26/2012 – $SPY

Can Volatility leak oil?

Fans of the Aqumin blog know I am a big watcher of market volatility. Volatility is the easiest way to judge sentiment in the market because liquidity providers are responding to the option paper (in the old days anyway) thrown their way. Yesterday going into AAPL and AMZN earnings (both were not bad but not great either) the market for volatility was starting to feel heavy. Even with the VIX about unchanged yesterday volatility started to drift in a bit.

Here is a snap from OptionVision™, a joint offering from Aqumin and ORATS that will be released at the FIA Conference in Chicago next week. I have the view inverted so the sliding volatilities show up on top. The big red spikey volatility per strike is in the way out of the money puts and really only represents a .01 or two tick in market width. Look at the breadth of volatility, the columns of red buildings showing volatility dropping across full months. Watching this live yesterday, you would have seen volatility sliding solidly for most of the day. This kind of strike by strike granularity helps me when I want to jump on a volatility trend.

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Will the trend continue? With GDP coming out ok I can make a case for weaker (lower volatility) through the week and premium drips out. The market looks like it really does not want to go anywhere. As long as Spain refuses bailout money I think the upside is muted. Trades that focus on controlled short gamma will probably work best. Either way I will be keeping my eyes on how the volatility moves, tick by tick.

OptionVision™ – data from ORATS

Read more from Andrew at Option Pit

Thursday, October 18, 2012

Aqumin Volatility Newsletter 10/18/2012 $AAPL

Are the AAPL options telling us something?

The market has settled into a pattern of movement lately of a little down followed by a little up. Most of the index skew has been steep lately so market volatility seems expensive relative to the actual moves we are getting. Not so really in the earnings stocks. The moves right now have been of pretty good size in the bigger names (IBM comes to mind). I thought it might be a good time to examine some relative skew in another big name.

AAPL is closing in on earnings next week and the implied volatility is relatively elevated. What looks a little different than normal is how the skew relates in all the months. Normally, AAPL has a bit more elevated IV in the OTM options due to all of the customer interest. Early this week, right now the upside is trading relatively cheap. Note all the green strikes below in my OptionVision™ landscape. That indicates that the OTM options are a little cheaper relative to the ATM options. Most likely the move down from 700 has something to do with that. The red options below show that the ATM options are more expensive than their OTM counter parts.

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What might work as a trade into earnings ? If the upside is trading cheaper, an OTM butterfly position with about 40-50 points between the strikes would be a nice way to buy some discounted deltas into earnings.  Normally when the ATMs are a bit more expensive, paper is planning on a big move. For the AAPL heads out there, this might be a nice ride through the cycle and you don’t have to pay as much as usual.

OptionVision™ – data from ORATS

Read more from Andrew at Option Pit

Monday, October 15, 2012

Aqumin Volatility Newsletter 10/15/2012 $WFC, $JPM

Lonely at the Top

This was yet another day last week when the economic news was ok (earnings were not too bad) but the market found a way to sell off a little. In reality it seems that good news is not good enough. Consumer sentiment has the highest reading today in years and the market still sold off. After the steady pabulum of Central Bank easy and liquidity injections the Algo guys have no reason to jump in and buy stocks. The old fashioned fundamentals are starting to come back into play.

Take the Wells Fargo (WFC) earnings report. Lower margins but higher profits reported, and the stock could not find a solid bid until the middle of the day. WFC is the lone red block in the lower left hand corner of my AlphaVision™ for Bloomberg screen, which means it is the # 1 market cap stock for the financial sector for the stocks I cover here (all the CBOE option listed names). This is the VWAP screen that shows me what part of the market is picking up momentum. Actually WFC got a little stronger as the day wore on (up means trading above VWAP).

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Trade wise I think the bank got over sold (with JPM), as the results were not as bad as the dire thoughts on this earnings cycle might suggest. I also like when the market is relatively weak, that I see some momentum come back into the name. For me it makes a nice time spread to ride out the rest of the earnings season. Buy a back month out of the money call, sell a front month out of the money call and let the movement go to the strike. At some point someone with some money will figure out this cycle is not as bad as the pundits would have us believe.

AlphaVision™ – data from Bloomberg

Read more from Andrew at Option Pit

Wednesday, October 3, 2012

Aqumin Volatility Newsletter 10/03/2012 - $RIMM

Is RIMM the new IBM?

Way back in the early 1990’s when MSFT was beginning its climb to dominance IBM was on its way to 0. It is hard to believe but at the time the mainframe business of IBM was going away due to the fantastic growth of the PC and mini computers. As a trader looking at the IBM pit I could see the every call strike going out worthless as the pit was selling every call that could find a bid. I think split adjusted the IBM hit $10 bucks or so (now trading north of $200). This is not an article about IBM but really one of a turnaround possibility. Companies, even ones where the prospects look bleak, can turn it around.

Imagine my surprise yesterday when my AlphaVision™ for Bloomberg ticker landscape (in real time) showed RIMM of all names strongly up in an otherwise very weak market, and super weak for the big techs. If you note the layout of my screen, I follow all listed names that trade options for equities and ETF’s in this landscape. This is a screen I euphemistically call my “looking for stuff” screen. While RIMM is not the big cap stock of the 2008 glory days some money finally is coming back to the name after a better than anticipated earnings report. This is the first time RIMM has been able to sustain some upside momentum after earnings for at least a year. That is a good sign for bulls.

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Will RIMM become the next 20 bagger like IBM in the early 90’s? Really too early to tell, but the implied volatility is in the 60’s, and for an $8 stock that is cheap enough to day trade the dips by buying ATM calls (which I have been doing) since there appears to be nice support down here. Even buying some calls going out on the cycle is not such a bad idea. After all, the competition is pretty fierce in the computer industry too and IBM figured it out. You never know but the options are cheap enough to give it a go.

AlphaVision™ – data from Bloomberg

Read more from Andrew at Option Pit