Aqumin Volatility Newsletter 09/20/2011 $EUO, $GLL

“Flaming Cheese”

Back in the 1990’s when I was a floor trader on the CBOE many a celebration was held at Greek Islands on Halsted Street just a hop away from the exchange. As soon as you get there the waiters would fly in with bottles of Retsina and plates of Taramosalata (we called it “Fish Whip” and it is delicious) and Saganaki (“Flaming Cheese”). It was (and still is) a great time with great food swapping stories of big wins or crushing defeats. The Greek Default problems are like my plate of flaming cheese in the old days, once very hot and now starting to cool. Let’s see what the recent cooling off looks like and if there are any tasty bites.

The key here is picking the right time frame to examine. I choose a simple landscape of IV30 (the forward looking 30 Day Implied Volatility) less the HV60 (the backward looking 60 Day Realized Volatility) for Landscape Color and Order with Landscape Height 1 Week Total return. This way I can see if a volatility opportunity is bound to a recent move. The AlphaVision™ Landscape above is mostly a sea of red (around 70% or so) for the most active 800 names that trade options. This means the liquidity providers are forecasting lower volatilities going forward than the last 60 days. No surprise but still it is a substantial part of the market for equity and ETFs. Simply, the forward looking volatility is trading at a discount to the realized volatility of the last 60 days. While that is the trend in red, I want to explore a couple of the names in green (which means forward IV30 is trading at a premium to the HV60 over the last 60 Days). This is the “Hot Cheese” on my plate.

First I zoomed into the ETF’s since I saw so few dark green names. My hard cutoff was 10 points over (IV30-HV60) but as you can see AlphaVision™ screens for all available names. I kept it to stocks just moving up over the last week since I wanted to take sudden drops out of the picture. First up (on the upside) is the EUO (Proshares UltraShort Euro ETF). The market is saying the name is going to move more than it has in the recent past. With the Euro Zone a mess, I cannot disagree. The next name was the GLL (Proshares UltraShort Gold ETF). This name has popped up in different guises in my past blogs. First the GLL was super cheap (volatility-wise that is) then the realized volatility exploded (two + weeks ago) and now the market has gone full circle and is pricing the IV30 at a premium to its last (very volatile) 60 days. This is now in the face of gold not making new highs anymore. While I am sure we have one more spike in gold at some point when Greece finally caves and defaults, it does feel like the big upside is starting to come out of the picture and paper is driving up the price of options in the short term for this inverse gold contract (GLL). Maybe a short term, short put spread-type play is in order here (maybe even a covered call since GLL is so close to its 52 week lows). This is either a trade small or add to watch list situation (you could wait for the spike and fade the move then), but the October cycle looks like an opportunity. But you should understand this contract is priced like this for a reason (meaning risky). If we get more of the same wishy-washy action out of Europe, look for this GLL premium to compress in the short term. Much (but not all) of the “flame” is off of the Euro “cheese” plate for now, except in select locations. OPA!

Author’s Note: Inverse, levered ETF’s need special care for risk and require special margining. Consult your investment advisor before making any such transaction. If you don’t understand it, don’t trade it.

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Aqumin Volatility Newsletter 09/13/2011 $INTC, $TSL

Chips and a Dip

I don’t think I am going to bother mentioning all of the bad Euro News. It just seems to be the same although we did get a small lift from sadness when rumors of Chinese buying Italian Debt surfaced. I can see the Chinese buying Italian cars, clothes and art but their debt is at the bottom of my list. Just one more reminder of how sensitive equities are to whispers of Euro News. I liked it better when we had left Euro trouble in the 20^th Century. Not all things are going horribly in equities so let’s take a look at the changing volatility landscape as of the close Monday.

First, as this is Expiration Week, I thought I would set up an Aqumin Landscape of 10 Day Implied Volatility over 10 Day Historical Volatility for a ratio of short term action coming into the final week of the cycle. A Dark Green Building has the ratio of IV10 TO HV10 2x or higher. The market is pricing significant moves for this week relative to how the name is actually moving. Also in the screenshot below Height is 1 Week Total Return (inverse) so taller buildings are down most for the week. I thought the Semiconductors stood out as the higher short term implied volatility had a reason to be elevated since the group (and on a couple of clicks turns out to be the Solar Semis) tanked this week. A name like TSL (Trina Solar) at >5 P/E seems to be the poster child for the sick sector.

A high profile US government backed bankruptcy in the space did not help the Solar Semis as they got pushed to lows for the year. Although the pricing is tempting in terms of elevated Implied Volatility there are too many overseas ADR’s and flim flam to take any real risk (ok maybe a little) in the group yet. The nice thing about surveying market data in AlphaVision is you can keep looking. Just flip over the landscape and zoom into the other side of the Semi story.

If you take out the Solar Stocks, the Semi’s did quite well in a pretty ugly week. They might have been the best performing Sub Industry if not for the collapse in Solar Chip stocks. While there is not as much short term edge in the volatility pricing as the Solar Semis, there is some decent edge as the market underlying volatility continues to cool (albeit slightly). Maybe this is the bounce in Semiconductors that is for real this year. At least you get some nice short term entry points in the Blue Chip Semi Chips. Have your Chips after the dip, as it were…

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Aqumin Volatility Newsletter 09/07/2011 $GLL, $UGL

Have we seen this before?

Sometimes I yearn for the good old days. I think I am old enough now to look back 15 years or so and fondly remember when a crisis or bubble had a beginning, middle and an end. The USA invented Brady
Bonds for Latin American debt in the 1980’s, fixed that. The Mexican Peso crisis in the mid 1990’s was mostly a collapse in the price of TMX (at the time one of the biggest traders on the CBOE) and Treasury Secretary Rubin (he handled the 1990’s flare ups rather well) rode to the rescue on the currency with guarantees. Brazil had inflation issues but moved to fix them with substantial policy changes. We had a great Biotech Equity Bubble in 1991-1993 when no one would buy a stock that made real money. The Asian Currency crisis in the late 1990’s help set up the current prosperity of today in that region. It was a good lesson that you don’t want to borrow too much in another currency and should make subsequent policy adjustments accordingly. The point for our current market volatility is that still, a year or so in, there are really no substantial policy adjustments in the Euro Zone (PIG austerity?) that market participants are buying. Let’s see how that play’s out in the market’s underlying volatility right now.

One thing I like doing is using simple arithmetic setups with different volatility measures to get a sense of what is happening behind the bigger indicators. In the AlphaVision™ Landscape below running on the Bloomberg Terminal I have set up a landscape using 10 Day Historical Volatility (HV10) minus the 30 Day Historical Volatility (HV30). If a name is moving more over the last 10 days than the last 30 days it will show up in green on the right of each GICS Sector. Building height is the total return for the week (up is negative in this case) when I pulled up this 3D quote screen Tuesday afternoon.

The first thing you notice is the Landscape is mostly red for the 750 or so names that trade 500 call option contracts or more. This means that the HV10 is less than the HV30 for most of the active listed names that trade options. As I commented last week, the crisis is slowing down in terms of Historic or Realized volatility recently but still near the peak of last year. What surprised me was that so few names had accelerating HV10 yesterday and barely a handful had HV10 15pts higher than HV30 (which is a level through observation I like to note). For the ETF group, both the UGL (ProShares Ultra Gold) and the GLL (ProShares UltraShort Gold) had rocketing levels and were leading ETF’S and very near 15pts higher. If I had a hard screen at 15pts, I would have missed these names using traditional screening techniques.

Now what does this mean? With the two levered Gold ETF’s leading the uptick in HV10 money is concentrating in these underlying contracts even more, pushing the Realized Volatility levels around. The gold trade is even more so the on again, off again way to manage risk for the average investor and the underlying volatilities are starting to show it. Euro Crisis solved gold in the tank, Euro Crisis on more of the same and higher with more Realized Volatility. Tough to believe we have turned gold into an early 1990’s Biotech stock but it is starting to trade that way. Almost 20 years later, same crazy activity but different names. Who knew?

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