Friday, November 30, 2012

Aqumin Volatility Newsletter – November 30, 2012 – $FB, $ZNGA

Two Socialites Divorce

If you are tired like I am of hearing about the weekly saga of what passes for government on Capitol Hill, there is always headline financial news to come back to. The volatility market is locked in a day trade of who says what and when with regards to the debt and deficit so that pretty much kills any trending volatility trade. One stock that has been on a tear recently is Facebook (FB) and the opposite trajectory is Zynga (ZNGA).

FB, I think is, going to continue to run. The volatility is cheap in there and buying calls seems like the easy trade. ZNGA is getting interesting because it is trading for just a shade over its cash on hand. Also note the activity today, fresh on the news that ZNGA will be just like any other game at FB. Namely the two companies appear to be severing their special relationship. Maybe ZNGA will be free to pursue other options in the Social Network space. That news did cause things to shake a bit. Implied Volatility jumped about 15% ATM in both Jan and Mar on the news with options trading twice the 20 day average volume per strike.

11-30-2012 2-43-39 PM

This OptionVision™ View shows mostly active call buying meaning, while the stock might be down a .1 on the news, paper is buying calls betting on a ride up. Sometime a stock does not move much but the options move a lot. I think I would just sell the OTM puts down at this level. On this occasion I think divorce might be a good thing. At least the call buyers think so.

OptionVision™ – data from ORATS

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Wednesday, November 21, 2012

Aqumin Volatility Newsletter 11/21/2012 - $SKEW, $SPX, $SPY

When will the skew revert?

One of the most glaring, unremarked pricing events last week was how flat the SPX skew was on the ride down from 1400 on the index. I actually had the CBOE skew index (SKEW) down around the absolute lows of the year. Essentially the skew in an option product is the degree to which the implied volatility in the out of the money (OTM) options differ from the at the money (ATM) implied volatility. There have been books written and plenty of money spent on divining the moves in the index skew “curve”. If you trade volatility products it behooves you to understand how the curve works. Let’s take a new view from OptionVision™.

The first thing to note is the buildings are higher as the columns move farther away. That is the implied volatility increasing down to the OTM puts. The ITM calls are on the left and provide less reliable readings because the bid/ask spread is wider. The view is showing index skew rising (green) in December relative to the ATM. Most of the Dec put protection was sold out last week and the curve is climbing in its natural fashion. Note the later terms just after the Dec ordinaries, the skew is still declining a touch relative to the ATM. Darker red is a steeper decline. Some Jan downside put sellers are still active.

11-21-2012 9-03-58 AM

The reason the later months are still lower is that puts are still for sale. The news says progress and paper is unloading their puts. For the market that is a healthier sign for some higher prices short term. Having paper start to take profits in long put positions I think is slightly bullish. Now we need the politicians to tie up their ends.

OptionVision™ – data from ORATS

Read more from Andrew at Option Pit

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

Friday, November 9, 2012

Aqumin Volatility Newsletter 11/09/2012 $SPX

Are we jumping off the Fiscal Cliff?

I marvel at the market’s ability to parse political activity. My own personal adage is that only a government can make a country broke and a market collapse at the same time. That takes a special kind of decision making from the top and the stock market this week knows it. The market hates uncertainty and having both parties (both were voted back in mind you) potentially draw lines in the sand unnerved traders. Surprise, surprise when both guys (Obama and Boehner) came out looking for a solution (Obama slightly less so since he was the big winner). How did the markets react?

No doubt the collapse this week was fierce. What was funny is that most of it was priced in. The VIX was priced at 18.27 before the election and as I write this it was slightly less, so at 18.13 now. If you look in the OptionVision™ landscape view below of the SPX, today there is a small shakeout in the volatility per strike. For whatever reason today the big players took just a small haircut on the volatility.

11-9-2012 2-16-45 PM

Maybe the President gets a bi-partisan solution or not. The market today said they took a small step forward. Until I see the volatility really decline I don’t believe either side. What the market does want is answers and the Fiscal Cliff, however unpalatable, is a spending and taxing answer which folks can budget. From a trade point of view, I would avoid short ATM gamma too much and focus on selling more OTM (way OTM) call and put spreads in the indexes. The problem with government wrangling is that it takes time and is not kind to long gamma positions. Not that we cannot have big moves, but I don’t want to depend on them either with volatility at this level.

OptionVision™ – data from ORATS

Read more from Andrew at Option Pit

Monday, November 5, 2012

Aqumin Volatility Newsletter 11/05/2012 - $F, $GM

Will the market get the lead out?

Usually on Fridays when the closing sentiment feels awful (or great) I like to take a simple snapshot of the week’s activity to get a good sense of how the market did. By the close I felt things were starting to get unhinged for no real reason. Granted, the US election and the Greek election (austerity budget or not) is setting us up for another binomial event in what has become the monthly roll of the dice on big political votes. Those events have set up some nice opportunities as the volatility subsides after the news.

I set up the AlphaVision™ for Bloomberg landscape below and I am looking at 1 Week Return for all optionable stocks listed on the CBOE. Note a good chunk of the market did ok last week. Things felt so bad because the $700 Ipad Mini rally did not materialize as fast as everyone wanted. Overall the US economic news was very positive but the specter of the unknown seeped into the cracks. Look at two of better percentage gainers, GM and F last week.

11-5-2012 9-47-47 AM

Normally I would look at the car companies and say no way, but things are getting better there. Actually as I picked through the landscape most of the stocks that have been decimated by the 2008 Financial Crisis did pretty well last week. The type of trade I like for a low volatility stock like a GM or F is the risk reversal (long out of the money call and short out of the money put) for a credit. The difference is start on the short put side first, since I feel the volatility will come in and leg into the long call side if the market catches a bid. No sense rushing into things until the election, and if the rally ensues, the short put should work fine. Ohio might end up making the big difference in the election but these two companies should keep their trajectories moving forward no matter who wins.

AlphaVision™ – data from Bloomberg

Read more from Andrew at Option Pit