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.

The 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.

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

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