Monday, March 24, 2014

Aqumin Volatility Newsletter 03/24/2014 $QQQ

Market is still worried

Stocks sniffed all-time highs again and pulled back from the brink. The simple answer is there is no reason to be running at all-time highs. That was enough to push stocks back off of their shiny new plateau. Since we are a volatility newsletter, let’s look at the underlying currents.

First off, the skew is not coming in from the panic levels we set earlier this week. If you look at the OptionVision™ Landscape, ATM IV is coming in but the further one moves OTM the rate of decline seems to taper. That would be the highlighted row moving right to left. What that means is there is a lack of willing sellers of downside puts.

3-24-2014 9-02-40 AM

As we going into the weekend there seems more to worry about than be happy about. The Fed broached the possibility of raising rates which means there is a bit more economic activity than they are letting on. The 90s went along quite well with rates that would be considered usurious right now. Those masses of capital out there sitting around are definitely not selling puts.

My simple advice then is to avoid buying the OTM options. I still like the QQQ as much of that index is in tech heavy, relatively low multiple names. The best trades would be to go out 6 months, buy an ATM call and near OTM put spread and sit and wait. If the skew buyers are right and they start to dump their puts, it would be a good time to lighten up on the spread in this strangle. If they give up earlier and you start to see deep red in the OV landscape on the downside puts, we might be in for new highs.

OptionVision™ – data from ORATS

Read more from Andrew at Option Pit

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