Wednesday, November 14, 2012

Aqumin Volatility Newsletter 11/14/2012 - $VIX

Digging into the VIX

There is nothing like a presidential news conference to start a market selloff. Anyone looking for a quick way out of the budget standoff was sorely mistaken this afternoon. I can be hopeful that a simple solution will work its way out but the rhetorical levers are coming out and the market does not like what it sees. Right before the President’s post-election news conference the market was showing us an interesting look at the change in index skew and I thought it instructive to take a look at it.

For this view I am using the newly launched product from Aqumin and ORATS called OptionVision™. The view here is all of the options in the SPY. Note how the volatility was down all along the curve this morning. The taller strikes are the more OTM puts in the SPY. Note the slightly darker shade of red. The call strikes are on the left side of each column and they were of a lighter shade of red even moving to some green (up on the day). Prior to the press conference downside skew was flattening out relative to other strikes.

11-14-2012 4-58-40 PM

By late afternoon IV turned up but let see how it looks.


11-14-2012 4-59-27 PM

With the SPY down around 1.13% as I write this the VIX has to go up. As they calculate the index it is pretty much assured and there is a lot more green then there was before. However the same pattern is persisting. The Jan downside skew is still down on the day and upside calls are even more bid as the market tanks. That the Dec volatility is up is indicative of the wrangling that is going to go on before the first. The recent announcements today did not help that much.

To trade this since the skew is so flat it would be better to buy 2 OTM puts and sell 1 more ATM put in the major indexes and take a nice credit. That way a jump in either direction will help set the position up to win regardless of how long the political haggling takes.

OptionVision™ – data from ORATS

Read more from Andrew at Option Pit

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