Aqumin Volatility Newsletter 01/11/2012 - $SPY

Here we go again…

With earnings season just getting underway the results look pretty good so far. The SPY closed on a year high yesterday and we are .60 from doing it again today. Without the din of structural implosion coming from the Fed and ECB the market finds itself wanting to drift up. Super Mario has declared the bottom in Europe and won’t lower rates. That was most likely a shot across the bow for Bernanke saying, “We got our house in order now how about you!” How is the volatility market handling that whole thing?

Well pretty good it would seem. Note the red strikes in the Option Landscape that is right at the crux of the deficit negotiations that are sure to dominate the headlines in about a month or so. The higher buildings in March and beyond are the volatility market bidding up the nonsense that is sure to come on the heels of Fiscal Cliff 2, The Sequel. That volatility is only down a .6% today (in the more red buildings) which is a pretty small number. The fact that it is softer at all might have something to do with an improving, albeit from the bottom, situation in Europe. The markets just started to reduce the effects of the budget talks. While I don’t know how long it will last at least for now the bid started to go.

Now note the more near term part of the term structure in the SPY (on the left). The bid there started to pop. Short term the IV seems to have hit a low of around 10% ATM in the near term cycles. My guess is that will hold for the low. The market is trying to balance the near term before the talks and the time after the talks. That sounds a lot like it did in late December. I think next week will mostly follow the pattern of this week which is mild movement on the back of decent earnings. We can revisit the longer term volatility then. For next week the short term Iron Butterfly trades in the bigger indexes or index ETF’s look like they will work while the players wait for the noise to come thumping out of the Capitol.

OptionVision™ – data from ORATS

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Aqumin Volatility Newsletter 01/04/2013 $HLF, $NUS

Modern Pyramids

I keep looking for the new countdown clock for the March budget negotiation deadline. One could hope now that more people are paying their fair share we can cut some spending. Like I said one could hope. At least for a couple of months the binomial market event is going to move to the background. We can have a surprise, and that is what the market is back to pricing as opposed to a known market mover like the beginning of the week. Looking for things to do requires looking, so the OptionVision™ Market Landscapes are pretty good for that.

I generally care about price and movement for trade generation with options. Unless the trade is a vanilla investment, idea generation has to start somewhere. The reason I like a realized volatility landscape with price movement is that they are the two biggest factors that move options day to day so you might as well go to the source. The HV10>HV20 just tells me stocks moving more now than last week. The short term realized vol (HV10) is hopping a bit more than the mid term (HV20) realized vol. In a sustained move in the underlying and there are some options waiting for a trade.

I have selected two stocks that have standout upward movement of a volatile nature. Both HLF and NUS share similar business models of multilayers marketing. Some short selling funds call them something else. As far as the companies go they generate cash and have relatively little debt and have been ongoing concerns for some time. Who ultimately is right I don’t know, but the stock volatilities are through the roof, especially when compared to the rest of the market. This makes for some interesting trades in the options. The higher volatilities will generate trades with lower risk like a butterfly or condor for relatively small dollars. I think that is the best way to trade the direction after the short covering rally.

OptionVision™ – data from ORATS

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Aqumin Volatility Newsletter 12/31/2012 - $SPY, $TLT

Buying the big move

The last post of 2012 is a little bitter sweet. Overall a good year for equity returns but I can’t shake the feeling that we missed something and the market is holding back. Most of the big issues of 2012 are not on the front page anymore. Much like the end of 2011, a few loose ends are hanging around. One thing I find telling is that the bond prices (measuring by the TLT) did not continue their move to outpace equities. The Fed is going to keep buying but that rally looks like it is coming to an end. The most crowded trade of 2012 is ending up around nowhere as I have TLT up around 1% YTD before dividends. Here is my last snap of equity volatility going into 2013.

This was the snap for Thursday afternoon in OptionVision™. Note the green bulge in higher implied volatility around the 3^rd-5^th weeks in the SPY. The two near terms months were expiring on Dec 28^th and Dec 31^st (today) were red signaling no real movement until after today. The market was and is still hungry for short term options but only after the deadline. That is how tight things are handicapped right now. We are at the strange place where the market is not moving much now but is expecting a big move in the not too distant future. Volatility players are betting that the result of the Fiscal Cliff talks will see a big move. I don’t disagree with them.

There is a trader saying that ‘volatility begets volatility’. In this case the market is so focused on short term options that I think a large move is inevitable. For me the best play there is to buy the 1^st out of the money strangles (closest to the at the money) in options with 2 weeks or less to expiration and then, here is the hard part - hold them. If 2013 starts like 2012 did, implied volatility should move lower but the market sharply higher. The gamma will pay for the volatility drop. The strangle should give you the choice just in case the politicians do not take this opportunity to save us at the last minute.

OptionVision™ – data from ORATS

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