Tuesday, April 7, 2015

Aqumin Volatility Newsletter 4/7/2015 $VIX $SPY

ATM IV melts up

Market volatility took a bit of a ride yesterday as the pre-open smack led to, what else, a rally. We got some Fed Governor news on blaming the winter but I feel like the lame jobs report was set up on Wednesday’s ADP number. $50 per barrel oil is not creating any jobs in that sector either. The pre-open action lately has not been a very good indicator of what is going to happen during the trading day.

If you look at the OptionVision volatility landscape in the SPY, IV was up per strike today even with the VIX up only .07. I expect some weekend effect but the bulge in the ATM volatility is usually a little telling. Note the slope of the yellow lines sloping up to the ATM. The demand for OTM puts declined today relative to the nearer the money volatility. Market players are expecting some movement but not a ton, what I refer to as “orbiting”. This generates day to day realized volatility but we really go nowhere. It was almost as if this rally deflated the skew a bit which is not really normal.

4-7-2015 9-25-10 AM

That leads to some upside volatility and ratio spreading again looks good. The OTM call condor or broken wing call butterflies for credits in the bigger indexes seem like the right idea. Keep the duration shorter. Place the short strike above the recent all-time highs since the bulge in ATM IV tells us the orbiting market is not finished yet.

OptionVision™ – data from ORATS

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