Somewhere between the ADP report on Wednesday and today’s NFP report the nation found a bunch of jobs. The broader markets also found themselves in record territory with NASDAQ making at least multiyear highs. What I find heartening (for bulls like me) is that the Treasuries are finally weakening with a near 3 point drop today. If the rally has to continue folks need to stop running to no-yield bonds. With better jobs news the need for the Fed to buy more is a much tougher case to make. The thing is we have .75% gaps in the SPX still and while the realized volatility has tailed a bit we are getting one to two days a week of bigger moves.
The last two weeks have been interesting for VIX and VIX futures watchers, for several reasons. In relation to the VIX, the realized volatility has been above implied for about 2 weeks and appears that it might stay there for a while.
I wrote the first installment of this series over two years ago, promising to explain the practical ramifications of the the basics that I’d covered using the tools of the trade. After enough procrastinating, I’ve finally gotten around to doing the second installment.
One of the most followed stocks on the NASDAQ, FB, had earnings last night. There was HUGE volume yesterday ahead of earnings and May3 weekly volatility got to 150% ATM. FB actually made a decent move by the end of the day today, moving up to near 29.00 a share. But, those who bought upside calls are probably NOT happy. Take a look at a shot of the FB May3 29 calls from yesterday.
With the underwhelming ADP report the private sector is just limping along but improving slightly. At some point here now that stocks are near all-time highs the residual of the financial crisis ending can only propel things for so long. I mean that as earnings have climbed back up over the last 4 years stocks have had just fits and starts depending on larger macro issue (US debt rating, Euro, US Fiscal Cliff, Europe, Europe, etc) . 2012 was nice but 2011 was a wash as investors worried about the Euro. Now lower interest rates are powering stocks globally. For some reason that is not enough to jumpstart hiring by companies. My only guess at this point is the continuing government dysfunction is worryin
Looking at the rally Thursday on what I would say is so-so news I am reminded of the fact that over the last year most of the melting has been to the upside. The market has tended to take off like a shot with Fed easing and the BOJ declaring war on interest rates. The US market with a decent dividend yield is starting to look attractive all of a sudden. While I am still mild bullish it pays to take a look at how the market is viewing volatility in the near term.
IN the last few days, since Bank of America took a dive on its earnings, the stock has found some real strength. BAC is now just a few cents from its 52 week high and threatening a 2 year high. The move has not been a slow grinding move like we see sometimes out of banks. It’s been a nice quick move.
This is why I am so confused by where BAC IV is trading. Take a look at this stock chart, IV graph (the red line) and 20 day HV chart (the blue line).
We were closing a position in the SL today and it was a ratio put spread turned into a very cheap (.04) butterfly and my feeling was BBRY is not quite done. Earnings are coming out in the July cycle and some trades that have been working very well lately are the modified earnings plays. What do I mean by that? Well the idea is to own gamma and pay very little in theta for duration of the trade. It is what Mark Longo calls on the Option Block “juice for free”.