Central Bank Action
I have to think that if I were an algorithm and a phase like “Central Bank Action” came across the tape, my electronic synapses would snap into action and start firing off the buy orders. That is a call to action for most machine readable news trading. The issue right now is one of liquidity. There is volume going up for sure, but not what I call volume at a price, which is a sign of a healthy, liquid market.
The liquidity difference is how a stock order gets filled. There is one lot liquidity now, and the SEC largely got what it wanted for small customers. If a trader needs to fill a big order, they have to push the prices around until they get filled or park an order in a dark pool somewhere. It is tough right now to just go in and buy and sell large blocks of stock at a price. When an Algo hits, there is no real volume, and the market rips or tanks. Take a look at yesterday in the VIX:
Charts by Think or Swim (www.thinkorswim.com)
The VIX had a 10% drop on the big but illiquid move in the SPX. The volatility index was responding to the move up the volatility curve in the SPX, but the volatility per strike in the options was not really declining. This feels like the Central Bankers keep trying to fix things, but the market is not ready to believe them. The trading has been like that all week. Going into the last trading day before the elections maybe the market is settling in for a longer period of declining but moving volatility.
The Greek Elections are one piece of what seems to be an endless stream now of restructurings for EU debt. It will be one less event though and some wrangling will ensue. Very small, short volatility positions like long put time spreads below the ATM in the VXX should work ok. Most traders though will be going home pretty flat which sometimes is the best position.
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