Orbiting Volatility
Stocks ended the week in an ugly fashion with the SPX down about 1.25%. There was enough in the bad sentiment train with Greece, Euro Area deflation, poor GDP and Russia annexing another part of the Ukraine. Not the stuff of rising markets with earnings only tepid this season. So far most companies that are reporting are doing better than estimates. Not 80% to blow it out but just ok.
Note the OptionVision™ IV landscape from Friday. There is not a hint of skew shift anywhere in the picture. Implied volatility is up across the board but the skew curve in the SPX did not change much. To me that is more of a signal of higher “orbiting volatility” than outright crash time. If traders were worried about a crash they would be bidding up the skew. After Friday there is a bid for near, at and out of the money options.
The persistent realized volatility is coming from two places: most things happening in the USA are good and near everything in Europe is bad. That gives us the 1% rallies and the 1% selloffs. The Greek pullout means the selloffs will be a bit more frequent than the rallies until there is a settlement, whatever that might be.
The trade is buy the dips in IV using a product like VXX. Use near the money time spreads for the high positive theta and keep the long month in March since it will cover the Greek negotiations. I think any time spread that buys March will pay to some degree as long as you can manage the gamma.
OptionVision™ – data from ORATS
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