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

Read more from Andrew at Option Pit

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