Friday, January 31, 2014

Aqumin Volatility Newsletter 1/31/2014 $SPY

Anatomy of a rally

Stocks rallied yesterday on a dose of good earnings and brisk GDP growth coming despite the slowdown in government spending. It is good news that the US economy continues to grow. As in 2011 and 2012, issues overseas can easily take front and center as they are this morning. The distribution of option volume in the SPY yesterday was not looking great for our rally.

The OptionVision™ Landscape shows volume (spike) and implied volatility change yesterday. The deep red upside shows that paper overall was selling upside calls essentially fading the rally. Note along the downside puts where the IV rose through to the end of the day. I have the SPY FEB 168 put highlighted as the curve jumped up yesterday in the big indexes. The calls sellers and the put buyers were out which is why the VIX closed about unchanged.

1-31-2014 8-55-59 AM

For today, look to see if the put sellers come back and pound down the skew taking profits. Essentially, this 3D picture will flip flop where the downside puts turn red and the upside calls start to turn green. The VIX itself feels fairly priced. Stocks are gapping up or down around 1% with regularity now, so a 17 VIX sounds right and it could go higher.

The SPY skew is a great place to watch short term sentiment. Right now the sentiment is looking bad as even the good EM currencies sell off. With the higher downside skew, setting up OTM broken wing butterflies would be the safest way to play a bounce. Wait till the put sellers come in to take profits. If you have no directional bias, a short time spread ATM in the SPY with a mid-term duration should work out ok

OptionVision™ – data from ORATS

Read more from Andrew at Option Pit

Wednesday, January 22, 2014

Aqumin Volatility Newsletter 01/22/2014 $XRT $GME

Sector Rotation

Stocks are off to a muted start this year as the record highs and so-so earnings reports are at loggerheads. For all the Iron Condor traders the market is finally being nice to them and that could be the position for 2014. If the first 3 weeks are any indication, trade will be of the slow and steady variety with a good catalyst needed to really get things going one way or the other.

What has already started off badly in 2014 is the retail sector. I have organized the OptionVision™ Landscape by the average 1 week performance. The retail group is the second worst performing sector after the homebuilders as the market flirts with records. After some disappointing Christmas results many of the brick and mortar retailers got killed.

1-22-2014 10-25-21 AM

When the herd starts to not like something, they tend to do it for a while and then the herd mentality stops. The retail sector is looking like that now and the only question is how long it is going to keep dropping back. Note how large the drops were in the affected stocks. Those kinds of drops cannot go on forever but can weigh on the group for a while.

Instead of focusing on one stock, an idea would be to trade the retail ETF, XRT. The implied volatility is very low in there even as many of the names are imploding. Buying a skewed strangle where you own the ATM put and OTM call in a longer time frame will give run on the downside until the market decides that retailers will be around for a while. The put should finance the call.

OptionVision™ – data from ORATS

Read more from Andrew at Option Pit

Friday, January 17, 2014

Aqumin Volatility Newsletter 01/17/2014- $SPY

Money for nothing

After making record highs earlier in the week the market is taking a breather. So-so earnings from INTC and slew of earnings next week is giving folks a slight case of the jitters going into next week. The market for volatility is as soft as the market right now. The MLK holiday is putting the last smack on it.

I have ATM volatility recording 8.01 with a week to go in the SPY Jan 24 cycle. The straddle is pricing less than a 1% hold for a week. I think that is too cheap. Normally the liquidity providers take out the weekend and they have not wasted any time this cycle. I am trying to remember the last time the market moved less than 1% over a 7 day span lately, and I cannot think of one.

1-17-2014 2-33-41 PM

The idea would be to buy an ATM SPY Jan 24 Weekly 184 straddle. The 1st day will almost literally be free from decay and that is how you get money for nothing.

OptionVision™ – data from ORATS

Read more from Andrew at Option Pit

Friday, January 10, 2014

Aqumin Volatility Newsletter 01/10/2014 $SPY

Withering Numbers

As we got an underwhelming number out of NFP, the market does not know what to do with itself. Stocks have traded lower for most of the day and volatility ATM has done nothing but go down. The takeaway of that is twofold- The Taper is on track with lower unemployment numbers and job creation is still spotty. That is enough to leave the status quo as is in a ball of confusion.

1-10-2014 1-49-40 PM

Note in my OptionVision™ landscape above that IV declined mostly ATM in the near term, but declined less as the puts got more out of the money. That is the skew responding to the decline and not quite giving up the ghost for volatility.

What I find most interesting is that the next two terms in the SPY are now trading below 10% ATM. That is not a lot of action going into earnings. It’s as if the market wrote off the current numbers in NFP and is content to do the same through the earnings cycle. We could be surprised of course, but IV almost always declines through earnings.

A smart trade would be to sell short term Iron Condors into what the market believes is limited movement. Keep at least 1 Standard Deviation from the ATM.

OptionVision™ – data from ORATS

Read more from Andrew at Option Pit

Friday, January 3, 2014

Aqumin Volatility Newsletter 01/03/2014 $SPY $VIX

The no-Conviction Sell-Off

Happy New Year!

2014 started off with big thud. I do a radio podcast on The Options Insider Radio Network on Thursdays and there was some speculation that the selloff was from longs needing to raise money to pay taxes. All the big names got smacked a bit after posting very good 2013’s. Conversely, gold is launching probably from an end to tax loss selling. The government is still in the market….

Normally in a sell-off the VIX goes up and yesterday was no exception. The volatility index is designed to climb when the market sells off. What was interesting midday is that implied volatility per strike in the SPY was going down. Below is an inverse view of the implied volatility in OptionVision™ for SPY. Note how the just out-of-the-money implied volatility declined the most.

1-3-2014 8-41-49 AM

In short, the most movement sensitive options were losing IV just as they should be gaining IV due to market uncertainty. I think this was a sign the sell-off had no real legs to it. I write this as we open only slightly higher Friday morning, but it would not surprise me if we get back a good chunk of the selloff over the next couple of days. That should tank the very near term IV.

A just OTM call time spread in the SPY owning the Jan 24 Weekly Cycle and selling the Jan 10 Weekly cycle should work right as we go into earnings.

OptionVision™ – data from ORATS

Read more from Andrew at Option Pit