Wednesday, June 27, 2012

Aqumin Volatility Newsletter 06/27/2012 - $NUGT

Muddling for Gold

As the volatility has calmed down some over the last few weeks (calmed, not gone away), it is interesting to note that stocks and gold have come off their recent highs. Seems like we are not hearing much about it but both are slowly losing the momentum we had coming out of the Greek elections. Since nothing was really solved, Spain now says they cannot finance at 7%, the market does not have much to look forward to since the fiscal issues and reforms are what’s needed to add some confidence. Right now that is not happening here or over there. When one of the best performing assets is the US Treasury Bond over the last 10 years, there have been some serious policy foul ups. I do like looking at the leveraged ETF for short term signals when they are a stand out. Look at NUGT below.

NUGT is the 3x Gold Miner Bull ETF. It was also the worst performing ETF over the last week as investors left gold in droves. The AlphaVision™ landscape below is inverted so not much good happened over the last week for long equities. The landscape color is showing increasing (green) and decreasing (red) realized volatility. NUGT as a proxy for gold is a pretty good indicator. The name is declining at a less volatile rate which is probably not good for keeping up the implied volatility. It feels like gold will muddle around here for a bit.

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For now the Treasury bond seems to have replaced gold as the flight to quality instrument. And imminent inflation does not seem around the corner. Short, controlled positions like Iron Condors in the midterm out of the money options with 60/40 payouts might make sense in this one. If the realized volatility continues to fall the implied volatility should follow soon enough.

Authors Note: Leveraged ETF pose substantial risk. Keep any transaction contract neutral and consult your financial advisor before executing.

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Thursday, June 21, 2012

Aqumin Volatility Newsletter 06/20/2012 - $VIX, $UVXY, $VIXY, $VXX


When Volatility goes down…

The mini-crash we had over the last month seems to be over (educated guess on my part). First, the market appears to be accepting that the Euro Area will continue to be a mess with lots of wrangling back and forth. Keeping the Euro party going is the goal. That stability is much easier for stocks to handle. Second, the US keeps muddling along with its generous fiscal policy and low interest rates. One or both of those has to change, just ask Greece. Even JPM was able to cover some of their short positions in CDS insurance. Lastly, the market crushed the volatility last week. Take a look at the AlphaVision™ volatility landscape below.

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The Volatility ETN’s went down over the last week, registering some of the lowest total returns in the market of any major exchange trade product (landscape above is flipped (inverted) showing what is down). Note the light colors of both highlighted names (VXX, VIXY and UVXY) in the AlphaVision™ for Bloomberg Landscape. UVXY had a trailing 10 Day Volatility, trading about even with the 30 Day Volatility. Both the VXX and VIXY had slightly higher near term volatilities (light green) but not overly so. To me that means an orderly decline which is better for equity values short term. There is a trading rule that when the VIX breaks 25 on the upside - buy it, and when it breaks 20 on the downside - sell it. This VIX trading rule seems to be holding true since the Greek Elections. I expect it to continue.

Authors note: Trading the volatility ETN’s is very risky and requires a solid understanding of the products’ underlying characteristics. Read more from Andrew or sign up for Option Pit Live at

Wednesday, June 13, 2012

Aqumin Volatility Newsletter 06/13/2012 - $JPM, $C, $BAC, $BRK, $STD

The Big Banks are moving like hot cakes

As we get into the Greek election weekend there has been plenty of up and down movement going on. The major indexes have been trading at 20%+ realized volatility, as the market trades on each bailout snippet, and finance minister squabble. The market for volatility is still looking very robust, but how long will that last? Look at the financial stocks below in my AlphaVision™ landscape view of 30 Day Realized Volatility. (This is just one of the landscapes we will be running live at SIFMA next week).

What helped turn the heat up on the Financial Sector was JPM’s trading losses. Those losses, while big, are nothing compared to the balance sheet of the company. JPM will most likely recover. The timing of that with the Greek political quagmire turned the mess into a market rout. Now the big financial stocks are swinging again. The Aqumin landscape below shows 30 Day Realized Volatility. The spiky dark green buildings are names with the most underlying volatility for each sector. In the Financials, most of the big money center banks are the most volatile right now. That usually means trouble for the rest of the equity market. The two big blocks in the front are just different classes of Berkshire Hathaway (which generally weathers financial storms well). The banks need to settle to sustain a rally in stocks (not just the flip flop we have had lately).

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The Greek election will (hopefully) provide a clearer picture of whether Greece stays in the Euro or not. I don’t think the ECB and Germany can afford to have a country keep going back on debt pledges. We will see Monday. Either way the steeper underlying action for the big banks can go on indefinitely. Short time spreads (these are big margin for retail) in the banks for the OTM puts should work out when the dust starts to clear. I think the volatility will start to come in and the US banks should catch a bid since they have already survived their own financial crisis.

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Friday, June 8, 2012

Aqumin Volatility Newsletter 06/08/2012 - $HOV

Cheaper to Buy than Rent?

With interest rates at or near historic lows, I have to give some credit to the Fed for somehow managing to keep rates low in the face of so much US Government borrowing. The Fed Chairman’s comments this week suggested he is running out of patience (and room) on the stimulus side. The politicians need to make some decisions now both here (fiscal cliff) and abroad (Greek referendum on the Euro). No doubt central bankers will keep one more round in the chamber until they really need it. Until then, we all wait.

Below is my AlphaVision™ landscape view of the 60 Day Historical Volatility and 30 Day Implied volatility. Note how most of the landscape is dark green. I usually see this when the VIX futures are trading 25 and above in the short term. Right now market volatility is pricey reflecting some of the European Debt Issues. The USA housing market is in its 4th year of a down turn. There is not much more downside there, come what may in Europe. Some homebuilders are even starting to make money again.

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Take a look at HOV. There has been a nice bounce in the market this week (for what reason, except selling fatigue, I’m not sure), but the homebuilders are still trading very much at the end of a 5 year range. Use the current market and higher volatility to pick up HOV below $2 by selling August puts. If we get a runner, buy Aug 2.5 calls to create a risk reversal for a credit. As we get past the Greek Elections this week, I think this trade should catch a breeze. By selling the put, traders can rent the long position prior to the good earnings report, and decide to “buy” later.

Read more from Andrew at Option Pit