Aqumin Volatility Newsletter 05/07/2013 $TLT

Bernanke Wins!

We have the market flirting with all-time highs again today and investors should be beginning to wonder if the financial crisis is over. Asia looks ok, India ok, Latin America ok and the US recovering but in a pokey big government way. Europe is still a basket case but that is mostly due to the reluctance of a good chunk of the population to work for a living and for the governments to stop paying for it. At least short term the Euro should stay intact while the drudgery of budget discipline starts to happen. While I won’t declare the financial crisis dead there is plenty of anecdotal evidence for that. TARP was a success, Fannie and Freddie could pay back what they owe and home mortgage payments are now cheaper than rents in many places. Take a look at the risk management tool of the last 4 years and see what is up with that.

I will use the TLT as a proxy for US Government Bonds and short term implied volatility (IV) is making year lows. Below in the OptionVision™ Landscape, May IV at the money is trading 9.7%. That is the low for the year. Note how the IV is dropping all down the term structure as well. Not as much as the smack down in the front two weeks but still coming in nonetheless.

Near term IV is the fastest way to gauge the markets potential movement, and right now options say that is not very much. The volatility market at least is saying the big down move we just saw will start to slow to a trickle. Not much is going to change on the part of the Fed and the volatility traders are starting to believe it. If you follow the logic that the financial crisis is easing somewhat, owning a cheap downside butterfly in Jun would work the best. Something like the Jun 120/117/114 strikes and just let the TLT drift lower. The panic premium should drift out of the TLT but really only slowly.

OptionVision™ – data from ORATS

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Aqumin Volatility Newsletter–5/2/2013 $VIX, $SPY, $VXX

So how is the VIX going up?

With the underwhelming ADP report, the private sector is just limping along and improving only slightly. At some point here now that stocks are near all-time highs the residual of the financial crisis can only propel things for so long. I mean that as earnings have climbed back up over the last 4 years, stocks have had just fits and starts. 2012 was nice but 2011 was a wash as investors worried about the Euro. Now what is powering stocks are lower interest rates globally. For some reason that is not enough to jumpstart hiring by companies. My only guess at this point is the continuing government dysfunction is worrying job creators both here and in Europe, but that of course is just speculation. What is a little more transparent is what is up with index volatility.

Here is an OptionVision™ snap of SPY volatility changing at around 3pm ET yesterday. The first column is the calls the second is the puts. Very ITM puts will be in the lower right of each column. What you note at the 159 strike I have marked is how light the ATM and OTM put volatility change is today. We have a decent sell off but the skew on the downside is not really going anywhere fast. If anything the skew on the upside in the near term is starting to flatten a bit (OTM IV calls move closer to ATM IV). The market is down and volatility goes up but it is hardly accelerating.

Click HERE for a short video with more details on trading in the current market.

I think after NFP, as has been the case over the last 6 months, the IV rally we just had will dissipate a bit. If the skew was kicking up more on this weak report I would worry more but for now the market thinks the new highs don’t look too bad. Considering where the rally has come from we could end up beating around here for a while. More of the same from the Fed could mean just more of same.

The Trade

Normally I would look at a VXX put, but buying an OTM VXX put time spread makes more sense. There is only about .57 in future premium so the decline would be slow coming. The more aggressive of you might look at closer Iron Condors using next week’s Weeklys in the SPY.

 

OptionVision™ – data from ORATS

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Aqumin Volatility Newsletter 04/26/2013 $SPY, $VIX

Is the market giving conflicting signals?

Looking at the rally Thursday, on what I would say is so-so news, I am reminded of the fact that over the last year most of the melting has been to the upside. The market has tended to take off like a shot with Fed easing and the BOJ declaring war on interest rates. The US market with a decent dividend yield is starting to look attractive all of a sudden. While I am still mild bullish, it pays to take a look at how the market is viewing volatility in the near term.

The 10 day volatility in the SPY is 18.5%. That takes into account the Boston bombing tragedy, but the market still had plenty of near 1% moves since then. What we have had is a market marching back up and the realized volatility has stayed firm. Note in the OptionVision™ Landscape below that most of the front month VIX options yesterday (when they opened) were slightly higher in the near term.

Implied volatility was increasing all across the board too, going into the close on Thursday. Those are the green option series below.

Normally I see this and then I think the open will be a bit weaker. This morning we opened down around .4% and it looks like we are treading water most of the day. The key is the action of Thursday. If the volatility gets bid into the close, that usually is a sign of a weaker tomorrow.

With the VIX still bid this afternoon this might be a good case of selling some premium into the weekend. Maybe an ATM time spread in the SPY in the first two weekly terms. I think the realized volatility holds up the back month and we should see the weekend wash out by Monday.

OptionVision™ – data from ORATS

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