Friday, February 22, 2013

Aqumin Volatility Newsletter 02/22/2013 - $AWAY

Up, up and AWAY

The market took a little pause this week as it shockingly came to the conclusion that the Fed will not be able to hold rates at near 0 forever. I feel like the guy in Casablanca who was shocked, shocked that there was gambling going on in Rick’s CafĂ©. Either way a selloff is bound to happen since things cannot go up forever except of course, it would seem, our Federal Debt. I won’t get into the politics but the economy did not grow in the 4th quarter and the market did not care one bit. All anyone cared about was visibility on the government role and as of the 1st of the year they got some of that. The market likes visibility because that makes choices a bit less gnarly. Visibility comes in many ways so I thought I would change track and show a different way to view numbers.

I am using OptionVision™ with the activity view. This is just relative volume (spike) and implied volatility change (color) to show what is happening today. If the SEC used OptionVision™ finding unusual activity would take all of 20 seconds. I thought this spike in AWAY looked particularly interesting today.

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AWAY is a web service that helps folks find vacation rentals and related items. A giant buyer came in and bought the AWAY Apr 30 calls pushing up the IV with it. I find this interesting because AWAY just reported earnings and this kind of post earnings activity is not normal. I am positioning myself accordingly.

The nice thing about looking at vast amounts of data at once is it is near impossible to screen for every nuance with an algo. Sometimes the story just “pops out” and that is the case with AWAY.

OptionVision™ – data from ORATS

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Friday, February 15, 2013

Aqumin Volatility Newsletter 02/15/2013–$SPY

Closing down the week

Most of the week saw sideways action in the major indexes. As I write this the S&P 500 is set to close around unchanged. There were too many cross currents in the global front messing with the mostly positive news domestically. With the S&P 500 at multi year highs the news is going to have to get a bit better for us to rally to new levels. A big Yen devaluation and slowing European growth are not going to pave account statements with a new path to riches. Neither macro issue was a surprise which is why the market shrugged it off a bit. The VIX however is going to close the week in the 12 handle which it has not done very often. Usually we have enough of a selloff in stocks to send the VIX back up. Not so this week. The fact that the VIX is here at all is because of index skew.

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Note how the market is closing in the SPY on my OptionVision™ landscape above. The upside calls are getting hammered (in red), some by the 3 day weekend, but the downside puts are not really responding as much as the out of the money calls. Note the IV color change is closer to white which is flat for the day. This is the skew steepening on the downside. The more the at the money volatilities decline the steeper the downside volatilities get relative to the at the money volatility. This is also the market taking the upside pretty much out of play. We might rally but the days of the big 1.5% rallies look dead for a while. The upside butterflies are so cheap it might be worth looking at them. If the downside skew actually starts to settle a lower VIX is not too far behind and the flies should do well.

OptionVision™ – data from ORATS

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Monday, February 11, 2013

Aqumin Volatility Newsletter 02/11/2012 - $AAPL

Will there be some dough in that AAPL pie?

Something that has been missing for a few years is finally starting to come back into the market. That something is buyers. Option volumes had a rough year in 2012 as most retail investors sat out and watched the politicians and governments pitch fits at each other. The last bull cycle in the 1990s was built on stability coming off of the Savings and Loan Crisis. Remember that? The problems from 2008 are starting to recede from the front of the financial pages but the public is only starting to think beyond it. It would be hard to say stability is back but it does feel better. I want to look at Friday’s rally in AAPL.

AAPL is still down from its highs but that does not mean it does not generate retail interest. AAPL traded over 1,000,000 option contracts on Friday, well above the 780k on average that usually trades. Looking at the OptionVision™ Landscape for volatility is helpful here. I took a snap for Thursday after the close prior to the small rally on Friday. Note how the volatility call skew started to move in here.

I have an OTM call selected and note how the shade is lighter as the strike prices increase near term. The IV might be coming down but it is doing less so up top. The volatility in the back months have stopped coming down all together. This is the market’s way of saying no big worries short term but the longer term moves are starting to catch a bid again.

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The upside skew catching a bid is the sign of retail interest. The bid in the back month is professional buying since the option prices are so expensive out there. I think the mid-term volatilities are close to bottoming out. As a trade I like mid-term long call spreads in AAPL, especially on a dip, as the best way to get long and use the more expensive call skew. If AAPL actually does return some dough to shareholders, lookout above.

OptionVision™ – data from ORATS

Read more from Andrew at Option Pit

Friday, February 1, 2013

Aqumin Volatility Newsletter 02/01/2013 - $SPY

Volatility in Retreat

In the age of Twitter I almost titled this “Volatility in Re-tweet.” Sounds a little like Tweety Bird but you get the idea. With the NFP numbers out and Consumer Confidence numbers ok the gravitational pull in equities is still up. I think the volatility pattern in the SPY is telling how the budget battles are going to shape. In short, I think the battle is over.

Take a look at the implied volatility destruction today in the SPY. I have been using the SPY mostly in the Aqumin Volatility Newsletter because it is widely followed and the volatility landscape is new to most people so I thought consistency would help. First, we see the IV come in today very hard. Note how the implosion is most on a percentage basis up front. That is just the NFP and CCI premium coming out now that the news is out.

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But if I tip the landscape up and look head on at the term structure (month to month) what do I see?

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Aside from this week’s expiring options I see a GENTLY ELEVATED term structure all the way out until June and beyond. Do you remember the crazy backwardation at the beginning of the year? Even up until two weeks ago when the debt ceiling was used as a lever for spending cuts, the term structure was showing bulges around the potential news. For now the volatility market sees pretty smooth sailing. The market has already priced in the Sequester since there is no negotiation necessary. I don’t disagree. Low volatility sometimes means not much is happening and after 5 years of pretty tall volatility we might have to adjust to lower numbers ahead. Don’t be surprised by a 12 VIX next week.

OptionVision™ – data from ORATS

Read more from Andrew at Option Pit