Friday, November 22, 2013

Aqumin Volatility Newsletter 11/22/2013 $VIX $DXM $SPX

Barking Dogs

So the big new is that the Dow screamed past 16000 yesterday. Screamed may be a bit too aggressive of a word but that is a new number. I believe the SP 500 will hit 1800 in short order to complete the twofer. In the meantime look at how that has changed the realized volatility in the OptionVision™ landscape below.

Note that most of the stocks have 10 Day HV’s below the 20 Day HV’s. Those would be red to white colored names below on the left side of the black lines I drew. The market for stocks over the last week has been mixed to mostly positive as well. The recent rally has sent the near term realized volatility lower, and that is why we are seeing very low numbers for VIX and other implied volatility indicators.

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Cheap volatility also brings opportunities. Look at a name like DXM. It was a social media marketing darling at one point this year, trading in the 20’s before dropping to the 4 handle. Bull markets tend to give individual names a bit more gas when some good news comes out. To trade a name like DXM, I would look to buy a ratio call spread (sell 1 call and buy 2 OTM) in a farther out cycle for even or better. There should be lots of dogs barking again come the spring. The ratio spread protects in case the dog goes quiet.

OptionVision™ – data from ORATS

Read more from Andrew at Option Pit

Friday, November 15, 2013

Aqumin Volatility Newsletter 11/15/2013 $SPY

A split market

The market is shaking off a few key items:

-A new Fed Chairman that gave nice testimony.

-Uncertainty around or the certainty it is a mess.

-The near 0 inflation in the Euro Zone but small growth is better than negative growth.

All of these things are not enough to lift volatility in the short term. As we go into the close the volatility in the near terms are getting pummeled. IV at the money is dropping as you can see in the OptionVision™ Landscape below. Options centered on the next budget debate are remaining bid.

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Note that the IV is picking up in the months after February. Also note the upside calls are picking up more of a bid than the downside puts. Calls are still bid in the SPY. After seeing this over and over again this year, I will make the same conclusion that we are going higher by year end. The market for volatility just seems to have given up.

The one place where IV does exist is in the volatility futures. That future premium looks like it will decay even if there is a pickup in IV. We will probably see the 11 handle in the VIX next week. Buying OTM put butterflies on short duration in the VXX or similar product should be a good low cost way to ride the softening volatility. That might even finance owning some premium in the “budget debate” terms.

OptionVision™ – data from ORATS

Read more from Andrew at Option Pit

Friday, November 8, 2013

Aqumin Volatility Newsletter 11/08/2013 $SPY

VIX rallies but the puts don't

Looking at the opening the market is a bit weaker (at 9am ET) after a very strong jobs report. The jobless rate is rising a bit as people are trying to get back into the labor force but the economy is creating jobs right though the launch of the healthcare law and the shutdown. That means the long awaited Taper could be here by December. While the market has been climbing in recent weeks, the skew in the index puts have been climbing right along with it.

On a day when the VIX was up, the volatility in the downside puts in the SPY was actually down. How does that happen? The out of the money puts relative to the calls were very bid as traders were hedging by buying downside puts over the last few weeks. Once the market swooned yesterday, they started to get out compressing the puts.

11-8-2013 9-38-13 AMThe at the money options and out of the money calls caught a bit of a bid along with the VIX moving down the index curve. That is the OptionVision™ snapshot below. Now the perception is starting to shift as the market dropped yesterday and the upside calls became more expensive. This is a pattern we have seen over and over this year.

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A trade would be to buy some nearer the money calls and sell more out of the money calls on a ratio and hedge by buying even more out of the money calls. This trade is a broken wing fly and you would look for a slight credit to put it on. When the curve comes in the trade should be unwound or if the market settles at higher prices.

OptionVision™ – data from ORATS

Read more from Andrew at Option Pit

Friday, November 1, 2013

Aqumin Volatility Newsletter 11/01/2013 $SPY

Option volatility is cheap

For the first time in a long time there were no market fireworks after the FOMC minutes announcement. The key thing is that the Fed sees less ominous financial conditions as the pain of the 2008 crash starts to recede in everyone’s memory. While there have been many head fakes since May, the possibility of Tapering is looking very real. It is quite possible the new chairwoman will put her stamp on the Fed and start taking away the punchbowl. The ECB meets next week to discuss the lack of inflation so it is possible that they pick up the mantle of QE once Mr. Bernanke rides off into the sunset. That is a big if as Super Mario likes to keep his powder dry.

What is all this doing to volatility? Note the volatility drop below. The near term IV is coming under more pressure than the far term IV. The ATM expiring in 21 days in 10.43 and that is very close to a single digit. Options are cheap and the contango could get steeper.

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There might be a reason. Stocks are handling the Taper possibility well. T bonds are lower but stocks are only .5% off of all-time highs. We could see some very low short term volatility leading up to the next FOMC meeting. What should work is selling some short term options and buying longer term options. The idea is a variation on the long time spread in any of the big indexes like SPX or RUT. The next round of fiscal bickering will be here sooner than we think and the IV out there should keep up. Short term the silence might be deafening.

OptionVision™ – data from ORATS

Read more from Andrew at Option Pit