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

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