Aqumin Volatility Newsletter, 6/19/2013 $SPY

Ben brought boring back into play

Since the QE program started, every Fed meeting has been met with a combination of shock and awe. Most of the shock going into the IV before the announcement and a lot of the awe is the sound traders make looking at the market with their mouths open waiting for news. I cannot blame anyone for waiting as we were doing ourselves. Normally, we try to position some sort of long gamma, which we did at the last minute, with some short volatility, which we avoided for the most part. The reason being this was a strange FOMC reading according to the IV changes throughout the day.

At the start of the day the VIX was headed up to just above 17% and is typical before any big announcements. You can see that in the OptionVision™ Landscape below, and notice how the near term IV expiring Friday and next week got bid up. The outer months just caught a slight bid.

OptionVision at 1008 ET

But after a couple of hours something strange happened. Note how the 3D landscape “disappeared” as all the back month IV took a dive. The bid in the front two terms remained, albeit a bit less, but the bid had left most of the term structure. Also note how the upper end of the OTM call strikes got more of a bid. It was like the news had seeped out already.

OptionVision at 1142 ET

As I write this the VIX is down .18 to 16.43 and the market is down around 1.25% giving back much of the gains this week. The market parsed the Bernanke tea leaves and decided he is leaving himself room to exit even though he said thresholds were not triggers. With 10 year yields raising the market is driving a truck through that hole. From the intraday volatility action someone seems to have figured that out already. While we sold off it was not a disaster and that is what the flow bet on. Ultimately economic growth is good and while we won’t have 8% up quarters anymore the disaster scenario is getting farther away.

I like the Iron Condor type trade in the big indexes since Big Ben has put boring back in play.

OptionVision™ – data from ORATS

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