Aqumin Volatility Newsletter 10/26/2012 – $SPY

Can Volatility leak oil?

Fans of the Aqumin blog know I am a big watcher of market volatility. Volatility is the easiest way to judge sentiment in the market because liquidity providers are responding to the option paper (in the old days anyway) thrown their way. Yesterday going into AAPL and AMZN earnings (both were not bad but not great either) the market for volatility was starting to feel heavy. Even with the VIX about unchanged yesterday volatility started to drift in a bit.

Here is a snap from OptionVision™, a joint offering from Aqumin and ORATS that will be released at the FIA Conference in Chicago next week. I have the view inverted so the sliding volatilities show up on top. The big red spikey volatility per strike is in the way out of the money puts and really only represents a .01 or two tick in market width. Look at the breadth of volatility, the columns of red buildings showing volatility dropping across full months. Watching this live yesterday, you would have seen volatility sliding solidly for most of the day. This kind of strike by strike granularity helps me when I want to jump on a volatility trend.

Will the trend continue? With GDP coming out ok I can make a case for weaker (lower volatility) through the week and premium drips out. The market looks like it really does not want to go anywhere. As long as Spain refuses bailout money I think the upside is muted. Trades that focus on controlled short gamma will probably work best. Either way I will be keeping my eyes on how the volatility moves, tick by tick.

OptionVision™ – data from ORATS

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Aqumin Volatility Newsletter 10/18/2012 $AAPL

Are the AAPL options telling us something?

The market has settled into a pattern of movement lately of a little down followed by a little up. Most of the index skew has been steep lately so market volatility seems expensive relative to the actual moves we are getting. Not so really in the earnings stocks. The moves right now have been of pretty good size in the bigger names (IBM comes to mind). I thought it might be a good time to examine some relative skew in another big name.

AAPL is closing in on earnings next week and the implied volatility is relatively elevated. What looks a little different than normal is how the skew relates in all the months. Normally, AAPL has a bit more elevated IV in the OTM options due to all of the customer interest. Early this week, right now the upside is trading relatively cheap. Note all the green strikes below in my OptionVision™ landscape. That indicates that the OTM options are a little cheaper relative to the ATM options. Most likely the move down from 700 has something to do with that. The red options below show that the ATM options are more expensive than their OTM counter parts.

What might work as a trade into earnings ? If the upside is trading cheaper, an OTM butterfly position with about 40-50 points between the strikes would be a nice way to buy some discounted deltas into earnings.  Normally when the ATMs are a bit more expensive, paper is planning on a big move. For the AAPL heads out there, this might be a nice ride through the cycle and you don’t have to pay as much as usual.

OptionVision™ – data from ORATS

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Aqumin Volatility Newsletter 10/15/2012 $WFC, $JPM

Lonely at the Top

This was yet another day last week when the economic news was ok (earnings were not too bad) but the market found a way to sell off a little. In reality it seems that good news is not good enough. Consumer sentiment has the highest reading today in years and the market still sold off. After the steady pabulum of Central Bank easy and liquidity injections the Algo guys have no reason to jump in and buy stocks. The old fashioned fundamentals are starting to come back into play.

Take the Wells Fargo (WFC) earnings report. Lower margins but higher profits reported, and the stock could not find a solid bid until the middle of the day. WFC is the lone red block in the lower left hand corner of my AlphaVision™ for Bloomberg screen, which means it is the # 1 market cap stock for the financial sector for the stocks I cover here (all the CBOE option listed names). This is the VWAP screen that shows me what part of the market is picking up momentum. Actually WFC got a little stronger as the day wore on (up means trading above VWAP).

Trade wise I think the bank got over sold (with JPM), as the results were not as bad as the dire thoughts on this earnings cycle might suggest. I also like when the market is relatively weak, that I see some momentum come back into the name. For me it makes a nice time spread to ride out the rest of the earnings season. Buy a back month out of the money call, sell a front month out of the money call and let the movement go to the strike. At some point someone with some money will figure out this cycle is not as bad as the pundits would have us believe.

AlphaVision™ – data from Bloomberg

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