Friday, January 25, 2013

Aqumin Volatility Newsletter 01/25/2013 - $AAPL

AAPLs 3 for a $1

The market is usually fickle about earnings. It is always a case of what have you done for me lately. AAPL is now no exception. When the future always looked brighter the name would rally day after day. Now the stock is really in a tail spin. Instead of talking about $500 as a buy point that number is $50 out of the money. That does not stop the AAPL faithful and a look at the implied volatility after earnings in this case might be helpful.

The volatility surface is a lot more readable in OptionVision™ this way. The red you see is a drop in implied volatility for the day. The building height is the implied volatility of the options at the time, which was on the close Thursday. As you can see that was a pretty big drop as the dark red is a 25% in this case. Note where the skew is most pronounced with the spikier buildings. The out of the money calls expiring next week have the highest implied volatility. I selected the AAPL Feb 1 Weekly 520 call for emphasis. The option expiring today I discount because the vega per option is so small. Even working down the term structure in the next few Weeklys the calls are trading with a solid premium to everything else. As far as the market goes, a run back up to $500 is getting priced in. The upside, almost but not quite, looks like the skew in the VIX. Note the rate of decline in implied volatility after earnings was less so in the OTM calls. I had the OTM puts trading at lower values yesterday than the OTM calls at the same distance from the ATM strike. While $400 might be possible there just is not the demand in the options yet.

1-25-2013 9-12-34 AM

One of the best times to trade options is after a big move. The market tends to get dislocated and there are some opportunities around. The fact that AAPL is trading well into the 30 realized volatility range for the last couple of months makes buying some back month options after earnings interesting. The month to month skew makes it even more interesting. For small dollars the Weekly OTM call time spreads look like a good bet. If AAPL does get week just add a few OTM put spreads. Sometimes the better trades happen after earnings. At least this time it does.

OptionVision™ – data from ORATS

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Friday, January 18, 2013

Aqumin Volatility Newsletter 01/18/2013 - $SPY

Things are shaping up

I don’t want to pooh pooh the rally we have had recently. After 3 years or so of the governments from both sides of the Atlantic trying to “manage” the economy, some of the shackles are starting to break off. Europe does not even make front page news anymore as the Euro is making some short term highs. Mario should thank Ben. Most, if not all, of the economic data has been improving as houses are selling and most businesses are generating decent earnings. With the super low interest rates and giant chunks of liquidity from the Fed the US is set to grow. I don’t know what Ben is going to do with his big balance sheet but I guess he will figure that out. One stumbling block remains and that is level of spending by the US government. The temporary stimulus of 2009 has become a permanent part of the spending landscape. The issue is priced out in the options.

In 2011 much of the volatility market was caught flat footed after the downgrade on the quality of US debt. That ignited a rally in the Treasury paper but shook equity markets down to post crisis lows. The Fiscal Cliff deal helped to bring in some revenue but the government still seems incapable of cutting spending. If you look at my OptionVision™ landscape below, that is reflected in the term structure for the SPY or any of the big indexes really. The front 5 weeks of expiration is much lower than the mid-March cycle. The March and beyond implied volatility towers have higher IV that is not totally explained by normal contango. There was a small rally in very short term volatility in the cycle expiring Jan 25th. Those are the dark green buildings in the second column from the left. That might be enough for a trade.

1-18-2013 9-15-23 AM

(Authors note: To see the daily, intraday term structure shift in the big indexes, or any listed product among many market data structures, use the OptionVision™ button noted above.)

On a day the market makes a 5 year high the volatility rallies across the short term. That usually means the market does not buy the rally. The fact that the March did not drop at all means the volatility market does not really believe a debt ceiling deal is ‘close’. For a one week trade, time spread type trades should work (sell the Jan 25 Weeklys and buy March). I don’t think they come up with a real compromise so far from the looming date since our political class is 0 for everything on that score. They head faked us in December so it might be worth betting they head fake us again. My only real question is whether the bond market or Congress will impose spending discipline. I hope it is the latter and hope is not my favorite word when it comes to the markets.

OptionVision™ – data from ORATS

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Friday, January 11, 2013

Aqumin Volatility Newsletter 01/11/2012 - $SPY

Here we go again…

With earnings season just getting underway the results look pretty good so far. The SPY closed on a year high yesterday and we are .60 from doing it again today. Without the din of structural implosion coming from the Fed and ECB the market finds itself wanting to drift up. Super Mario has declared the bottom in Europe and won’t lower rates. That was most likely a shot across the bow for Bernanke saying, “We got our house in order now how about you!” How is the volatility market handling that whole thing?

Well pretty good it would seem. Note the red strikes in the Option Landscape that is right at the crux of the deficit negotiations that are sure to dominate the headlines in about a month or so. The higher buildings in March and beyond are the volatility market bidding up the nonsense that is sure to come on the heels of Fiscal Cliff 2, The Sequel. That volatility is only down a .6% today (in the more red buildings) which is a pretty small number. The fact that it is softer at all might have something to do with an improving, albeit from the bottom, situation in Europe. The markets just started to reduce the effects of the budget talks. While I don’t know how long it will last at least for now the bid started to go.

1-11-2013 4-08-28 PM

Now note the more near term part of the term structure in the SPY (on the left). The bid there started to pop. Short term the IV seems to have hit a low of around 10% ATM in the near term cycles. My guess is that will hold for the low. The market is trying to balance the near term before the talks and the time after the talks. That sounds a lot like it did in late December. I think next week will mostly follow the pattern of this week which is mild movement on the back of decent earnings. We can revisit the longer term volatility then. For next week the short term Iron Butterfly trades in the bigger indexes or index ETF’s look like they will work while the players wait for the noise to come thumping out of the Capitol.

OptionVision™ – data from ORATS

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Friday, January 4, 2013

Aqumin Volatility Newsletter 01/04/2013 $HLF, $NUS

Modern Pyramids

I keep looking for the new countdown clock for the March budget negotiation deadline. One could hope now that more people are paying their fair share we can cut some spending. Like I said one could hope. At least for a couple of months the binomial market event is going to move to the background. We can have a surprise, and that is what the market is back to pricing as opposed to a known market mover like the beginning of the week. Looking for things to do requires looking, so the OptionVision™ Market Landscapes are pretty good for that.

I generally care about price and movement for trade generation with options. Unless the trade is a vanilla investment, idea generation has to start somewhere. The reason I like a realized volatility landscape with price movement is that they are the two biggest factors that move options day to day so you might as well go to the source. The HV10>HV20 just tells me stocks moving more now than last week. The short term realized vol (HV10) is hopping a bit more than the mid term (HV20) realized vol. In a sustained move in the underlying and there are some options waiting for a trade.

1-4-2013 11-17-39 AM

I have selected two stocks that have standout upward movement of a volatile nature. Both HLF and NUS share similar business models of multilayers marketing. Some short selling funds call them something else. As far as the companies go they generate cash and have relatively little debt and have been ongoing concerns for some time. Who ultimately is right I don’t know, but the stock volatilities are through the roof, especially when compared to the rest of the market. This makes for some interesting trades in the options. The higher volatilities will generate trades with lower risk like a butterfly or condor for relatively small dollars. I think that is the best way to trade the direction after the short covering rally.

OptionVision™ – data from ORATS

Read more from Andrew at Option Pit