The Weekend Effect is back so is the Deficit Crisis over?
One of the first things we try to convey in the Pit Report each day is what the volatility markets are doing. There is always room to discuss a stock going up or down, but volatility study is one of the places we help our clients the most. A day like today is the perfect example. The reason being, of course, is what the numbers say, and what is really happening can be two different things. For instance, the closing number on the VIX today was 12.58, up about .12 on the day. At first glance, that is the volatility up slightly on a day when the market hit another short term high with the SPX just an open away from 1500. Those seem to be two contradictory things.
First, a trader needs to understand how options decay. Mark does a good job of explaining that here. Now that our readers have consumed all that information, today’s number is more a function of traders adjusting their time to expiration on their theoretical values. The implied volatility did not come up as much as the days to expiration in the TV model caught up with today.
The big red circle indicates what happened on Friday after the announcement that Congress was going to use more subtle ways of reducing the deficit. The VIX level that had held for a number of days went into a tailspin. One of the big factors was that traders could actually take the weekend’s worth of decay out of the options on Friday. The problem with this theta reducing strategy, in the past year, is the nasty habit of some political body making earth shaking policy on a Sunday night. You could hear the sigh of relief on Friday as the Vol products crumbled.
Livevol (r) www.livevol.com
The $1 up opening in green circle in the VIX today is just a confirmation of that. Then, at 13.30 VIX, the real sellers came in selling the option premium in the SPX. Weekend effect swinging in the red circle and what could be the short term top in volatility in the green circle. Premium is also in the VIX futures, and looking at the close to closing prices, future premium took it on the chin. In a sense, liquidity providers took out the weekend on Friday because they felt like there was less risk. The action today means they were right.
So much for our favorite volatility products… That was an inside joke.
VIX Future quotes from cfe.cboe.com.
We held off last week while the deficit reduction talks still included the debt ceiling, but the VIX future premium was very large and tempting. With that uncertainty moderated for 3 months, Controled short positions in the VXX and other like products makes sense again. A cheapy SPY put for insurance is looming on the horizon too.
If you would like to learn more, tune into the Pit Report and find out every day what the volatility market is really doing.
This is the type of information we will train you to analyze in our gold course. If you needed help following this trade, you should be in that course. Register here, or call us (888) for more info.
We have VXX positions.
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