Aqumin Volatility Newsletter 12/21/2011 - $COF

What happened to the juice?

I don’t mean OJ. I mean the juice in the options. That is what we used to call the “extrinsic” value in options. Essentially that was the premium in the options above the “intrinsic” (or parity) value of the option itself. There have been sharp declines in implied volatility (we have been showing those) in the markets and I think we finally hit a “spot”. The “spot” is where the market does not really care about Europe anymore because the ECB pulled a Bernanke and flooded the banks with liquidity. Here is how it plays out in AlphaVision™.

First we go to our Landscape of IV30 less HV60. Followers of this column know that has been the go to landscape for inflection points in the turbulent 4^th quarter of 2011. The landscape below is an utter surprise since it is almost entirely red. That means the current IV30 is below the HV60 for nearly every stock in the S&P 500. There is no question now that liquidity providers are forecasting lower implied volatility going forward even with the VIX at lows for the Q4 in 2011. Also note that while implied volatilities are dropping, stocks are going up (taller buildings on the top of the landscape). The pop in stock prices this week has met with a nice drop in implied volatility.

Now for the big surprise which is the volatility crush in the Financials (see below). I am detailing the sector below because that group has been the out and out loser for most of 2011. In the Aqumin Blog of 12/07/2011, I detailed a rising from the ashes of financial insurance stocks. For stocks in the S&P 500 only Financials, Telecoms and Energy don’t have any names with a trailing HV60 trading below the current IV30. The two most volatile sectors have cooled down to the icy point. So where does that leave us?

Well it makes me want to buy financials. And to find what I want to buy I flip over the landscape (below) and only a few names were down for the last week.

Generally when volatility gets so low (no more juice!) the market is taking out one side of movement. COF (Capital One Financial) is down for the week but had a nice move up today (12/21/2011). Maybe the ECB rescue is what the market needed and we start to go higher in the boring world of lower realized volatilities. A little punch of liquidity while the politicians try to get things going, one can hope.

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Aqumin Volatility Newsletter 12/14/2011 - $PFE, $MRK, $TEVA, $LLY

Steady Drugs

Right now the equity market seems to be discounting European News to some degree. Overall volatility levels are dropping (still nasty little swings though) for the most part and that trend has been steady since I have been chronicling it here in the Aqumin Newsletter. The market seems to want to fight upwards. On that note I wanted to mention some names that have been clawing their way up this morning.

First off I use my daily VWAP (Value Weighted Average Price) Landscape to look for smaller movement trends. Just to see if anything is jumping. Basically, a green stock on the top of the landscape means the stock is trading above its intraday VWAP and is up on the day. The position is the Market Cap (as well as size of footprint). Essentially it is showing some strength in an overall weak market like we have this morning.

Note all of the Big Pharma Names popping up. When most of the other Big Cap names were drifting lower the MRK’s, LLY’s and PFE’s had a little juice to keep it going. The next Landscape is the HV30-HV10 look at underlying volatility. What this measures is the difference in realized underlying volatility over the last 30 days versus the last 10. Note the names were just about flat for the week (closer to the landscape horizon) and red (declining short term realized volatilities). What we have is a nice slow roll till the end of the year. I think this sets up nicely for some controlled put selling (spreads) on these low P/E names using the Jan cycle. A few fund managers might have to dress things up toward the end of the quarter and these names weathered the crisis like few others. Take a look.

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Aqumin Volatility Newsletter 12/07/20011 - $AGO, $MBI, $RDN, $MTG

Some Financials are springing back to life

As the market sits for the 4^th month waiting for big things to come out of Europe (this time the day is Friday) there have been some solid trends that give some hope that the end is drawing near. As I normally do with this newsletter I am following broader volatility trends with price movement. The two go together like Starsky and Hutch. Are the moves accompanied by declines or gains in volatility? This helps in determining the quality of the move (and maybe some froth). If the names move higher on increasing volatility, to me that means folks are reaching for the options and going to the market for protection, or just a good old fashion “surprise” on the underlying movement. For the former I use the AlphaVision™ Landscape in total for broad trend and for the latter I look if there is any intra Sector activity. So what do we have this morning?

First, I will start with the IV30 less HV60 Volatility Landscape. This has probably been my most useful view the last 4 month so. Why? Because the market has been moving in lockstep and sell offs and rallies have been accompanied by wide swings in volatility. The IV30 (forward looking day 30 Implied Volatility) less HV60 (backward looking 60 Day Implied Volatility) give a window into how liquidity providers are pricing the near term month against a backdrop of last 2 month’s average movement. You see mostly red in the landscape below (red means the IV30 is less than the HV60). That has been a trend for at least a month. What you notice in the foreground for Health Care are a bunch of Dark Green stocks. These are just Biotechs and trade like this normally (they don’t do much until an FDA announcement, so the options tend to be priced higher). The big difference I have seen is the amount of Dark Red (IV30-HV60 < 10 points) names. That is increasing by a good bunch. Over all the trend of cooling is picking up steam.

Note the zoom in on the Financials below. One reason I like creating these landscapes with a movement component is to judge the quality of the move. As I started clicking around I noticed all the Financial Insurers are having a bit of resurgence from S&P ratings - do they still matter? It sure looks like the market thinks so. Also note that the group pretty much is dominating the IV30 and movement area for the Financials the last week. I think the long term prospects are pretty good for this industry (could it have gotten worse over the last 3 years) mostly as the survivors start to bounce off the bottom (AGO was the big driver but decent follow through from MTG, MBI, RDN) and start to generate money again (some might get a boost also from settlements). Given the nice levels of IV30 you can create some long delta positions just below the market if you missed the first leg of the bounce or fade the euphoria in a controlled way (read spreads) above the market. Either way some things appear to be looking better even if it was the most battered part of the market not so long ago.

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