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.

10-26-2012 9-09-40 AM

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

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