Friday, August 30, 2013

Aqumin Volatility Newsletter 08/30/2013 $SPY

Whither the Skew

While the administration decides what to do about Syria most of the economy seems to be humming along at a steady if unspectacular rate. But whenever there is saber rattling going on in the Middle East that seems to take a front seat to the slightly improving underlying conditions. You don’t need to go past the IV changes in the SPY to see that.

In the OptionVision™ landscape I have implied volatility change in the SPY. Note how the IV increased (green) yesterday pretty much in every strike in the index. This effectively put the decay back into the options prior to the weekend. No doubt this was from the possibility of action in Syria. Take note how the rise in IV occurred on the close. The more ATM options saw IV increase more than the OTM put options. The market for volatility moved from a panic type set up to one of just plain moving.

8-30-2013 9-23-11 AM

Implied volatility can increase and the skew can flatten like it did on Thursday. That usually means the market is aligning for a rally, or at least not a crash, since the bid for downside protection subsides. There are still too many moving parts with respect to the Middle East so maybe it is better to trade this a little wider. Maybe a SPY OTM strangle swap selling next week’s term (Sep 06) and buying the following weeks term (Sep13) should pick up the decay that the market put back yesterday. An ATM time spread that works with a 1% move up or down in those terms might work as well. While there could be action this weekend, it seems like getting the coalition together might take more than 3 days. That is what the current change in skew says anyway.

OptionVision™ – data from ORATS

Read more from Andrew at Option Pit

Wednesday, August 21, 2013

Aqumin Volatility Newsletter 08/21/2013 $K

Very Unusual Activity

While the market sits on its hands waiting for the Fed I thought I would bring up some unusual activity that I picked up in the OptionVision™ Relative Volume landscape yesterday.

Note here that the activity is in a normally quiet name Kellogg (K). It trades some but the strike activity was at 5x normal volume in the Jan 57.5 calls and 2x normal on most of the other strikes. This snap shows huge volume. The Relative Volume calculation divides the Average Daily Volume (ADV) by the number of active strikes. That adds up to a whole lot of activity as total ADV hit 45,000+ contracts yesterday. Also note that the IV change for the most part is all red. That means in a stock like K which moves about 60 cents a day paper crushed the IV (implied volatility) on all the paper sold.

8-21-2013 12-17-50 PM

Now that was very interesting since the day saw mostly higher IV in other names. The reality was a computer malfunction that sent dozens of orders cascading into the system and the contracts executed in 1000 lot sizes at a $1. It is very easy to see relative activity in the 3d environment. We’ll see if those trades will get busted or not.

OptionVision™ – data from ORATS

Read more from Andrew at Option Pit

Friday, August 16, 2013

Aqumin Volatility Newsletter 08/16/2013 $GDXJ

Roaring Gold

Equities are going to finish with a tough week. The specter of Egyptian unrest, higher interest rates and the Fed tapering was enough to pull stocks from their lofty highs. I will say the reasons for the last two mean that the economy is getting better which should be good in the long run. In the short term the market has sold off 3-4% on the Tapering Boogeyman, so the selloff is not a total surprise.

What did not sell off this week were Gold and the Gold Miners. The metal and the peripheral stocks had a big run which most traders are attributing to short covering. The headline inflation came in at the number at that was enough to scare the gold shorts into covering. That also drove the IV up. Looking at the realized volatility landscape notice the Metal and Mining stocks. Gold miners dominated the front of the pack on size and speed of move relative to the market.

8-16-2013 12-54-28 PM

I am not calling the near term top in gold, but watching markets move like this when money piles in so fast, the move is usually hard to sustain. Look at the small cap miner ETF, GDXJ. The IV is coming in a bit today all across the upside of the curve which means some profit taking in options.

8-16-2013 12-51-16 PM

The whiff of inflation does not inflation make. Judging from Treasury bond prices, the market is not looking for lower rates and is expecting some kind of reduction in Fed buying. That should hurt gold in the short term but I would not short it. A trade that could work is a ratio call spread that would buy just OTM calls and sell a few extra OTM calls farther up the curve. The spread should return a small credit if gold stops or produce a decent return if there is some more run.

Be careful of the margin requirements of any extra short calls.

I have positions in gold.

OptionVision™ – data from ORATS

Read more from Andrew at Option Pit

Tuesday, August 6, 2013

Aqumin Volatility Report 08/06/2013 $VIX

VIX skew getting a little lift

The market is falling off today mostly as a result of the chatter on the “taper talk”. With economic data improving, the reason for the Fed to become a bigger holder of debt is looking less and less like a necessary idea. From a volatility point of view, how is the market starting to absorb the fact that the easy money days are soon to be over? The answer to that is the upside in VIX is starting to pick up.

Market volatility is near the year lows so it was hard for it to get much cheaper. VIX below 12 printed only a couple of time this year. Volatility generally responds to an impending move by making skew jump up a bit. We are starting to see that this morning. Note the upside calls in the VIX are picking up some volatility as shown in my OptionVision™ landscape. The OTM options are picking up volatility faster than the ATM options. This is just a little caution creeping into the market.

8-6-2013 11-27-21 AM

The interesting thing is most of the IV blip is concentrated in the two near term option months. The volatility is reacting in the short term, but there is almost no activity in the 3rd month. If the rise in IV starts to fade it would make sense to buy a VIX strangle around the 13/14 strikes for a $1.00. If VIX prints like it did yesterday below 12 the intrinsic value of the strangle would be at least $1 so there is low risk. If the market starts to really fall on the taper talks VIX is back to 16 in a hurry.

OptionVision™ – data from ORATS

Read more from Andrew at Option Pit