Aqumin Volatility Newsletter 03/15/2013 - $SPY

The volatility is showing the way today…

Well after a record setting week, I am reminded of a period in the early 90’s. Not so much the “irrational exuberance” of Mr. Greenspan but more of 1993-1994. We raised taxes and got serious about addressing the budget which is starting to feel like 2013. The hot stocks at the time were biotechs and right now we have 3D printing companies and social media. Old Tech is limping along. Banks and Oil and Gas are doing fine thanks to the closing of the financial crisis and the domestic production boom. And just like 1994, there was little participation by the public because 1987 was still stuck in everyone’s head. I am not saying the public will miss the rally but the public is missing the rally now. In short there is plenty of room for stocks if the trajectory of the budget continues to come into focus, namely lower deficits and sustainable spending. How does the market view the records and near records this week? Lower implied volatility is the answer.

If you look at the mid-morning snapshot of IV in the SPY using OptionVision™ note the gentle contango starting to take shape. The near term gamma intensive options are starting to fade in IV and the longer term volatilities are starting to perk up just a bit. Note the downside of the near term Weeklys in the SPY. Those options are finally starting to break down. Much of the weekend decay came out yesterday in option prices, so the IV really looks to be fading here into the weekend.

Stocks tend to like the contango in option volatility. That makes everyone feel normal. At least for the end of this week the market looks like it will head to higher prices at a slower pace. No doubt that will give investors a chance to jump in before it is too late.

OptionVision™ – data from ORATS

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Aqumin Volatility Newsletter 03/07/2013 - $XLF

Volatility begets Volatility

I don’t quite know what happened between last Monday and today but someone with a big bottle of happy pills was doling them out like candy from a Pez dispenser. The Sequester is no problem, Italy has no choice but to follow the path, Draghi won’t lower rates and Uncle Ben won’t raise them and just like that the Dow is at an all-time high. I am of the mind that the equity markets have had mostly lower valuations for a while based on the fact that the economy cannot grow. There were 0 returns in 2011 and a nice return for 2012 but averaged out it was not that much. 2013 is giving things a kick but stocks are at nothing like crazy valuations. The big question is can growth happen, and if history serves it can if the governments can get out of the way. Somewhere between last Monday and today that point started to crystalize.

I have a snap of XLF in the morning on my Unusual Activity screen and there was a size trade going up in the XLF Mar28 Weekly 18.50 calls. Note the green hue means the volatility is going up in the strike. On the day about 100,000 calls went up and almost all were buyers.

By late in the day more buyers jumped in and the big volume was all on the call side. For the first time I can remember in a long while buyers are lifting the offers in size and buying calls in, drum roll, the bank stock ETF known as the XLF. Hard to believe and the funny thing is banks are still relatively cheap although not as cheap as they were last year when the XLF was roughly 13. Call buyers driving up the volatility, so pinch me is it 1998 again?

Beside the flip tone my early lesson in trading volatility is vol begets vol. Buyers of options can generate a head of steam and with stress tests coming out most likely loosening up bank balance sheets for the first time in half a decade a sleepy name like XLF can take off. The buyers of the 18.50 flattened the upside so I bought some Mar28 Weekly 18/18.5 call spreads for ok prices so it was not a total buy the rumor trade. I will most likely hold them long after the test results are announced today.

Option Pit will be giving a free webinar March 13 on how to use OptionVision™ to help spot order flow and build positions accordingly. Click this link to register: Option Pit "Using orderflow to trade options"

OptionVision™ – data from ORATS

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Aqumin Volatility Newsletter – 3/1/2013 $FB

The Facebook Curve

The market had a bit of a reversal on Thursday for what reason I cannot quite figure out. Maybe politics, but the economic news all week has been ok. One name that took off on the close was Facebook (FB). FB spent most of it day in the mid-26 level only to ignite on the close to close 27.25. It was like all the sellers went home. What it left at the end of the day was a really flat term structure.

If you look in the OptionVision™ Landscape there is not a lot of variation in the implied volatility in the first 5 Weekly expiration cycles. There is almost no contango at all. Contango is just the effect of lower implied volatilities in the front month than in the back month. Normally when a stock is not doing much the IV exhibits this pattern. With the nice pop on the close, the term structure in FB is a bit different. It is dead flat until you get to the earnings cycle a bit farther out. I find this in a popular name like FB to be a bit strange. This allows a trader to buy time spreads for pretty good prices since they don’t have to sell the front month options down. The fact that there is not much contango there means an investor can use the front options to help pay for the back month options at favorable prices.

I think take the term structure at what it is and buy OTM call time spreads in the big Social Network on the cycle prior to earnings. You will end up liking that you did.

I have FB positions.

OptionVision™ – data from ORATS

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