Monday, December 31, 2012

Aqumin Volatility Newsletter 12/31/2012 - $SPY, $TLT

Buying the big move

The last post of 2012 is a little bitter sweet. Overall a good year for equity returns but I can’t shake the feeling that we missed something and the market is holding back. Most of the big issues of 2012 are not on the front page anymore. Much like the end of 2011, a few loose ends are hanging around. One thing I find telling is that the bond prices (measuring by the TLT) did not continue their move to outpace equities. The Fed is going to keep buying but that rally looks like it is coming to an end. The most crowded trade of 2012 is ending up around nowhere as I have TLT up around 1% YTD before dividends. Here is my last snap of equity volatility going into 2013.

This was the snap for Thursday afternoon in OptionVision™. Note the green bulge in higher implied volatility around the 3rd-5th weeks in the SPY. The two near terms months were expiring on Dec 28th and Dec 31st (today) were red signaling no real movement until after today. The market was and is still hungry for short term options but only after the deadline. That is how tight things are handicapped right now. We are at the strange place where the market is not moving much now but is expecting a big move in the not too distant future. Volatility players are betting that the result of the Fiscal Cliff talks will see a big move. I don’t disagree with them.

12-31-2012 11-51-12 AM

There is a trader saying that ‘volatility begets volatility’. In this case the market is so focused on short term options that I think a large move is inevitable. For me the best play there is to buy the 1st out of the money strangles (closest to the at the money) in options with 2 weeks or less to expiration and then, here is the hard part - hold them. If 2013 starts like 2012 did, implied volatility should move lower but the market sharply higher. The gamma will pay for the volatility drop. The strangle should give you the choice just in case the politicians do not take this opportunity to save us at the last minute.

OptionVision™ – data from ORATS

Read more from Andrew at Option Pit

Thursday, December 20, 2012

Aqumin Volatility Newsletter - December 20, 2012 $SPY, $VIX

Skew Vision

One of most quoted indexes in the financial industry is the VIX. It is also the most misunderstood. How so? The reality is most participants do not understand what the makeup of the product is. Yesterday the VIX spiked to 17.46 just before the close. I know readers of this blog will say the deficit talks stalled and they would be right. Now what did paper actually do? Let’s unpack what caused it.

What I find interesting is how the buying played out. Normally when you see a spike in IV and a market heading south, the paper is flying to the OTM puts. That steepens the skew curve on the downside. What we had today was something a little different. What you see in a 3D curve graph below is that the upside today started to pick up more of a bid.

Looking at the highlighted area of the upside calls in the SPY on my OptionVision™ landscape, you see they were up 5% or more (dark green). You say big deal, but in the land of skew those options were moving more than their put counterparts. Relative moves are important when looking at index skew and when the upside starts to outperform the downside on a big IV move, paper is buying calls or at least that is where the worry shifts.

12-20-2012 9-26-21 AM

The market is having a hard time pricing the gamma (a big up move possibly) with the vega (the attendant volatility crush). Paper just started buying calls and liquidity providers stiffened the upside skew. That is what I am going with because that is what I see. If you don’t believe the market thinks volatility is headed lower just look at the Jan VIX future. Day one on the job as the spot month and it went backward with the full term ahead of it. Not exactly a rousing bid for juice.

Use dip in the market and pop in upside skew for either Iron Condors or long calls spreads in the major indexes. Maybe Christmas comes early this year.

OptionVision™ – data from ORATS

Read more from Andrew at Option Pit

Friday, December 14, 2012

Aqumin Volatility Newsletter 12/14/2012 $AAPL

AAPL vol is through the roof

As I watch the market this morning most of the volatility is coming from AAPL. Traders still cannot get past the fact that AAPL has changed into a slightly different stock lately. 10 Day realized volatility in AAPL is hovering around the 40% level, and as of today the stock is showing no signs of giving that up. Implied volatility in AAPL, measured by the AAPL VIX (VXAPL) is up 3 full points this morning. If you want to see where all the buying is located, take a look below.

The OptionVision™ landscape helps identify how the skew is changing in AAPL. Most of the upside calls have been getting the action. The OTM calls are actually increasing in volatility faster than the OTM puts. If you look below the dark green strikes are up 10% or more. Note all of the dark green increases on the calls are pushing the skew almost parabolic on the upside.

12-14-2012 11-11-01 AM

As AAPL dances around the $512 level, buys are still bidding up calls as the legions of AAPL believers come in and play the next bounce. AAPL could well bounce and most likely will be the beneficiary of any progress on debt talks. If you must get long selling OTM put spreads (475 level) make more sense if the IV starts to cool. Take your time in entering since the stock is still moving around a bit.

OptionVision™ – data from ORATS

Read more from Andrew at Option Pit

Friday, December 7, 2012

Aqumin Volatility Newsletter 12/7/2012 - $XHB, $HOV

Leaving the Homebuilders Behind

One of the strange observations of this past week is how much the market has gone nowhere. We closed around 142 on the SPY last Friday and we most likely will close around 142 today. The recent unemployment report was ok but has some noise in it from Sandy. The casual market observer would think not much happened. However, there are some interesting things going on…

Look at the Big View landscape from OptionVision™. While there was a lot of scattered weekly activity the only real “parking lot” you see is in the homebuilder sector for 1 Week Total Return. I use the term parking lot to describe a landscape sector that has no buildings up for the week. The homebuilders did not participate in the scattered buying and were losing some momentum after their recent runup.

12-7-2012 9-24-20 AM

So, let’s flip over the landscape (below) and see what is there. HOV is a standout with the most pull back of the homebuilders. The landscape color is pretty evenly split between red and green although the green stocks are a little heavy. Color here is the IV30 trading a premium (green) to HV60. Right now IV is probably a little high over all but not too much based on current movement. I have seen this landscape 90% green before and 90% red before over the past year.

12-7-2012 9-34-00 AM

As far as the homebuilders, this is a group that most likely has some big profit taking into the end of the year as the group has performed very well this year. I expect the move up to restart as soon as everyone is done grabbing their cheapy capital gains rates for 2012. The XHB (SPDR Homebuilders Index) has seen $24 once in the last 3 months (it is up from 17.15 at the start of the year) and that is a pretty good level to sell a few puts. Eventually things might start to move again….

OptionVision™ – data from ORATS

Read more from Andrew at Option Pit