Friday, June 28, 2013

Aqumin Volatility Newsletter 06/28/2013 $SPY

The Weekend Effect is coming early

As the market prepares next week for a slew of economic data, there is one thing on the calendar that is a known quantity. That is the fact that next week trading will get curtailed by a day and a half. So liquidity providers have to stuff 3.5 trading days into 7 total (including the weekend) calendar days. I think they have started early.

If you look at this OptionVision™ snap from the close Thursday, the cycle expiring on July 5th has had the volatility knocked out of it more than its Weekly cousins. By taking down the implied volatility the liquidity providers effectively take out some of the decay of the options. They can only do this of course if there are no buyers on balance. And that is the surprise really, since the economic numbers have been providing pretty good activity of late.

6-28-2013 3-49-47 PM

I still think the market has plenty of move left in it now that the thought Q Easing is going to slowly chip away the value of the Bernanke put. Buying premium into the weekend or Monday will only have a fraction of normal theta. A trader in a sense gets some time for free. The idea of a trade would be to buy near dated straddles at this reduced rate and see where the market takes us. I am pretty confident it won’t be SPY 161.

 

OptionVision™ – data from ORATS

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Wednesday, June 19, 2013

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.

6-19-2013 3-50-15 PMOptionVision 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.

6-19-2013 3-54-11 PMOptionVision 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

Read more from Andrew at Option Pit

Thursday, June 13, 2013

Aqumin Volatility Newsletter 06/13/2013 - $SPY

The Orderly Decline of the Market

The last few days are if anything a sign that all good things must come to an end. The market has now gone from the proposition the Fed will stop buying paper to the realization that the Fed is going to stop buying paper. The BOJ is declaring success and no need for further stimulus as the debt there got to 140% of GDP. Lucky for them it is domestically held. A big part of our rally, at least I thought, was the semblance of some fiscal order in the US after the Fiscal Cliff tax hikes and the dreaded Sequester. The market flew all the while knowing the Fed would taper when the unemployment picture got better. My thought here is that the lack of budget talk by Congress after the results of lower spending and higher taxes has knocked 500 billion off the deficit is removing what was a positive catalyst. Anytime the market sees clarity it rallies and when things get murky we selloff. The two big pins of deficit reduction and low rates are unsettling folks. Is it a panic selloff?

Below is the OptionVision™ Landscape with the SPY using just a change in IV on the close Wednesday. Ignore the first term because it expires in two days. The rest of the market for volatility is moving in a very uniform way. This happens when the market slowly sells off and the index creeps down skew curve. Note how there is no increase in the OTM puts strikes. If anything, the upside calls are catching more of a bid as the skew flattens there but overall a uniform selloff.

6-13-2013 11-50-04 AM

Is this a sign of the bottom short term?  Nope. It is not a sign of a panic either. The market for volatility is going up because it is supposed to. The market is taking a breather as it gives back most of the 1600 and above level since the two good reasons for being there are going away. Take the volatility where it is and look at a downside and upside butterfly in the SPY with about 6 strikes apart. Let the market go to where it is going to go.

 

OptionVision™ – data from ORATS

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Friday, June 7, 2013

Aqumin Volatility Newsletter 06/07/2013 $VXX

The vol of vol goes lower

There was a lot of touchiness this week waiting for the NFP. As it turns out the number was ok, even with the unemployment rate making a small uptick. Stocks caught a bid and are starting the slow grind back of possibly regaining some of the highs we saw just a couple of weeks ago. What is hard to believe is that VIX hit 18.6 yesterday early in the morning and it is now trading 15.49. That is a more than 3 point drop from the highs. It also says a lot about near term implied volatility.

Looking at the VXX in OptionVision™ this afternoon. Note how the red Option Landscape is even redder in the downside puts. Usually puts trade cheap in the VXX because they are not the panic securities, the calls are. The put holders today had to get out as the VXX traded from 21 to just 19 this morning. VXX holds the front two month VIX futures so activity in here is a good proxy for future volatility.

6-7-2013 1-46-32 PM

Right now, the market for the volatility of volatility got smoked. Usually I take that to mean there will be less volatility going forward at least in the short term. Generally VXX has a problem with decay which puts pressure on the product and now with big news like the NFP out, there will be even more pressure here. The liquidity providers took down the IV because they expect more option selling so don’t be surprised if you see lower levels in the VXX over the next week.

OptionVision™ – data from ORATS

Read more from Andrew at Option Pit