Why the SPX Has Rallied, Why it Has Not

Option traders, we are going to take a small break from the VIX and talk economics and the market rally.  As the SPX touched 1425 today, a little piece of me was satisfied about the rally.  After all, we have been calling for this slow rally for some time.  Why?  Well, for starters, we felt like it was a good time to play counter-trend to sentiment.

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Is the VIX Low?

This is the question so many of my option mentoring students are asking me.  I also get tons of questions from the option profits people on this as well.  In fact, just about everyone wants to know if the VIX HAS TO RALLY???

The answer is, hisoricially, yes, but in relative terms, the answer is in the graph below.  Take a look at this chart of 30 day IV relative to the last 10 days of trading (the Red is 30 day IV):


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That was the sound of VIX making a new low this year

When I was an SPX trader in the early 1990’s, I remember 16% volatility being a screaming sale and around a 9% volatility being a screaming buy.  Balancing position Vega between those two extremes was mostly a function of how much skew I wanted to own (or sell) at any particular time.  That just brings me to where we are at this point in time.  The VIX traded 13.32 today to set a low for 2012.  Does it mean anything?


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SPX Heading Higher?

Generally speaking, I think my take on which direction the market has been heading is about as good as anyone else's(and by that, I mean worse than a monkey throwing darts).  However, there are times where I feel certain about my market inclination.  Right now, that inclination is up, and I will tell you why.  

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What to do when the whole world is for sale, buy a BAC!


While the market struggled today to find some kind of direction (no European bad, bad news on the funding front but no ECB goodies either on this European holiday), a few indicators are pointing south.  Not market direction mind you but more of the market volatility variety.  Each and every day, I see new 52 week lows for name implied volatility rolling across my screens.  This means a few things:

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Is Facebook going Hard to Borrow?

With the swings in volatility this year, I never thought a 1.15 move would count as exciting.  But moving from 13.75 up 1.15 counts as excitement on a day, when the SPX was down .15.  Yes .15!  I think there is some interesting VIX future action going on (premiums are pretty fat), but the lower VIX gets folks a bit scared.  VIX got within .09 of the year lows going into the Italian Bond auction this week.  That is pretty impressive for how much the mood has swung.  I think there is some anticipation coming into the Italian debt offering later this week and will cover a trade for that tomorr

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Why Did GRPN Options Over Price Today's Move?

Many of my option mentoring students were wondering about the move priced into GRPN options today.  The stock 7.5 dollar stock, into its earnings had an incredibly high volatility, almost all of it priced into August options that expire tomorrow.  We can clearly see the vol pump in GRPN Aug in this cut out from Option Vision (a new analytic tool we will be using here at Option Pit with some regularity).

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Is there Any Vol To Sell?

As many of you option traders know, the VIX closed below 15 for the first time in some time.  While I think the VIX is getting pretty cheap, when we look at all of the equity vol indexes, some equities look even cheaper.  There are few things to remember:

1.  While a 15 VIX might seem low after the last 4 years, it would have been above normal between 2004 and 2007.

2.  There are always things that are more cheaply priced.

3.  There may be trades that are more expensive in relative terms.

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CSCO Vol Looking Appealing?

It is hard to believe that after years of being in the wilderness, CSCO makes Goldman Sachs conviction by list.  In the 1990’s, that would have moved CSCO about 25%, but these days, it is only good for about 3%.  Either way 3% for CSCO is a big deal.  For a stock that usually hums along at 20% or so, volatility is worth noting whenever a sleeping giant wakes up.

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Paying the Price for PCLN

'It Can't Move That Much"

Famous last words from many of my option mentoring students, when they are dabbling in selling premium into earnings.  Well, those option traders are typically given a tough education about options in short order.  We saw this happen in tall order in PCLN options.  Take a look at the closing price of the weekly straddle:


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