Thursday, May 23, 2013

Aqumin Volatility Newsletter 05/23/2013 $TLT

The Fed Speaks

Ben Bernanke testified before Congress yesterday and said things were not too bad but could be better. He thought that both sides getting together to simplify the tax code would be great. One can still hope. The bigger news is that the Fed could stop buying bonds if the job outlook improves so they are waiting. Waiting generally means movement should slow down. No real surprise there since that is what they have said for a while. The market liked it in the morning and did not like it in the afternoon as 3 weeks of buying came to an end. Add a slowdown in China and we are down ¾% in the morning. I am using OptionVision™ to look at how the bonds, via the TLT, reacted to the Fed news by the close yesterday.

5-23-2013 11-38-18 AM

By the end of the day the market had bid up the volatility in the TLT pretty solidly. Notice that some of the upside caught an extra bid. The mid-June ATM IV in the TLT is around 14% which is right at 6 month highs. Today’s downdraft might make TLT interesting again but after beating around for the morning session bonds did not move much, so the flight to quality action is dimmed. That is usually a sign the IV should start to drift back to lower levels. I think a controlled short premium trade, Iron Condor type, in the July cycle would work and close when the IV gets to 11.5%. The Fed said they are waiting for jobs data which means bonds should keep going sideways in a range for a while.

OptionVision™ – data from ORATS

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Thursday, May 16, 2013

Aqumin Volatility Newsletter 05/16/2013 $GOOG

Does a volatility pop tell a story?

With the VIX up .05 to 12.86 as I write this, the market is taking a long overdue breather. For the last two weeks through good news and bad, stocks have rallied pretty hard. For instance AAPL has moved a lot but really has gone nowhere. I think the big winner has been GOOG running from around $800 to just over $900 in a two week span. Let take a look at the volatility in there.

On May 3rd the upside skew in GOOG was pointed down in the May 24 Weekly options. I had the ATM volatility around 20% and the 50 point OTM volatility around 17%. We call this a steeper upside curve as opposed to flat since the OTM options are trading for cheaper price pointing the curve down.

Now we fast forward to this morning and as you see below in my OptionVision™ landscape, the upside calls are pricing a bit higher than the ATM. It is not a lot but remember, those options last week were 3 volatility points the other way and at $65 per volatility point that is a big swing. Note this morning as GOOG tanked I snapped this picture of the upside skew. The OTM calls got real bid as some investors looked for a bounce (dark green).

5-16-2013 2-51-14 PM

By late in the afternoon the IV change went from about 3 points on the upside to only 1.5 points. The difference in the shades of green denote a 10% change versus a 15% change in IV. I think this says the quick bounce buyers hoped for got disappointed and the rally faded out of the IV.

5-16-2013 2-54-46 PM

The GOOG IV is no longer a bargain but the upside skew is still pretty expensive given the steep curve it usually trades at. When the cool comes out of the upside, look for the rest of the IV to follow.

Normally I would say 1 x 2 upside call spreads for credits (buy 1 selling 2) but the margin is prohibitive (and risky!) in GOOG. You might try an upside broken wing fly (May 31 cycle) for close to no money and a protective put just in case we get a brush back. These positions have been working well lately. If you own GOOG, out of the money calls have usually not been this expensive and it would make a nice sale against a long stock position.

OptionVision™ – data from ORATS

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Tuesday, May 7, 2013

Aqumin Volatility Newsletter 05/07/2013 $TLT

Bernanke Wins!

We have the market flirting with all-time highs again today and investors should be beginning to wonder if the financial crisis is over. Asia looks ok, India ok, Latin America ok and the US recovering but in a pokey big government way. Europe is still a basket case but that is mostly due to the reluctance of a good chunk of the population to work for a living and for the governments to stop paying for it. At least short term the Euro should stay intact while the drudgery of budget discipline starts to happen. While I won’t declare the financial crisis dead there is plenty of anecdotal evidence for that. TARP was a success, Fannie and Freddie could pay back what they owe and home mortgage payments are now cheaper than rents in many places. Take a look at the risk management tool of the last 4 years and see what is up with that.

I will use the TLT as a proxy for US Government Bonds and short term implied volatility (IV) is making year lows. Below in the OptionVision™ Landscape, May IV at the money is trading 9.7%. That is the low for the year. Note how the IV is dropping all down the term structure as well. Not as much as the smack down in the front two weeks but still coming in nonetheless.

5-7-2013 1-55-20 PM

Near term IV is the fastest way to gauge the markets potential movement, and right now options say that is not very much. The volatility market at least is saying the big down move we just saw will start to slow to a trickle. Not much is going to change on the part of the Fed and the volatility traders are starting to believe it. If you follow the logic that the financial crisis is easing somewhat, owning a cheap downside butterfly in Jun would work the best. Something like the Jun 120/117/114 strikes and just let the TLT drift lower. The panic premium should drift out of the TLT but really only slowly.

OptionVision™ – data from ORATS

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Thursday, May 2, 2013

Aqumin Volatility Newsletter–5/2/2013 $VIX, $SPY, $VXX

So how is the VIX going up?

With the underwhelming ADP report, the private sector is just limping along and improving only slightly. At some point here now that stocks are near all-time highs the residual of the financial crisis can only propel things for so long. I mean that as earnings have climbed back up over the last 4 years, stocks have had just fits and starts. 2012 was nice but 2011 was a wash as investors worried about the Euro. Now what is powering stocks are lower interest rates globally. For some reason that is not enough to jumpstart hiring by companies. My only guess at this point is the continuing government dysfunction is worrying job creators both here and in Europe, but that of course is just speculation. What is a little more transparent is what is up with index volatility.

Here is an OptionVision™ snap of SPY volatility changing at around 3pm ET yesterday. The first column is the calls the second is the puts. Very ITM puts will be in the lower right of each column. What you note at the 159 strike I have marked is how light the ATM and OTM put volatility change is today. We have a decent sell off but the skew on the downside is not really going anywhere fast. If anything the skew on the upside in the near term is starting to flatten a bit (OTM IV calls move closer to ATM IV). The market is down and volatility goes up but it is hardly accelerating.

5-2-2013 8-47-35 AM

Click HERE for a short video with more details on trading in the current market.

I think after NFP, as has been the case over the last 6 months, the IV rally we just had will dissipate a bit. If the skew was kicking up more on this weak report I would worry more but for now the market thinks the new highs don’t look too bad. Considering where the rally has come from we could end up beating around here for a while. More of the same from the Fed could mean just more of same.

The Trade

Normally I would look at a VXX put, but buying an OTM VXX put time spread makes more sense. There is only about .57 in future premium so the decline would be slow coming. The more aggressive of you might look at closer Iron Condors using next week’s Weeklys in the SPY.


OptionVision™ – data from ORATS

Read more from Andrew at Option Pit