There were more musings out of Europe of a TARP like bank recap for troubled banks along Mediterranean. There seems to be a direct correlation between vacation spots in sunny climates and non-payment of obligations (Spain, Greece, California, etc…). The Euro managed a rally today with the SPX up 1.5% or so. All is rosy right? Well not so fast, the VIX was only down 5.77% (VXX, its future based cousin down 1.74%) which is pretty light for such a solid rally. As usually it was a rally without any liquidity so look at the individual options in the July SPX.
One of the things we encourage our option mentoring students to dig into is the study of volatility. We want all of our traders educated on reading volatility. One nice way to trade IV's is the CBOE Equity VIX indexes; the one we are watching today is VXAPL.
One thing that is confounding my options mentoring students, along with basically every trader out there, this trader included, is where VIX might be headed. We have now seen the SPX rally to 1325 twice. It has rallied 50 points off the bottom, yet, VIX has not really moved in 3 days. Any level over 20% is elevated and shows that the market has some fear built into it right now. Obviously with good reason: Europe, China, the US, you name it, there is plenty of reasons to be fearful.
When I think of a Goldbug, I think of Richard Scarry’s books for kids with the little Goldbug hidden in the pictures. Sometimes you have to look very hard to find the little guy in the cartoon pictures. Goldbugs, in the financial markets, are a little easier to find. They are bidding up gold every time they get a chance. I have to say, I cannot blame them. With the printing presses running full tilt in the dollar factory over the last few years, gold has been on a real rocket ship ride.
When viewing the market, many people look at today as a sigh of relief. That the world will not end and all is well. Personally, I don't see it. While there is talk out of Europe that a deal might get done, I do not think the markets are quite as comfortable with the movement as one might think. For starters, as I write this, IV in SPX options was down more yesterday than it was today.
A fairly quiet day today as the market is deciding which way to go as time marches on until June 17th. At some point, we have to look past the Greek Vote and plan for when things start to look a little better. I am not saying a lot better but, on balance, better than negative. One thing going right now is the higher overall market implied volatilities.
Go away on vacation and look what happens. The Treasuries make an all time high (or low yield) because the USA missed the jobs number. Wow, is that all? Maybe the weight of slow job growth, collapsing major currency, Asian slowdown, our own fiscal cliff, and the ensuing slowdown next year finally put a nail in the coffin. I know during the Depression bonds traded at very low yields, but the USA is not in a Depression, not yet.
What an ugly day for the markets and VIX. VIX and VIX futures were up sharply across the board. VIX is now at the high for the year.
Our COO on First Business News
As I reflect on my options trading, I always ask myself, what I am missing. One of my biggest worries is the fear of the unknown. As they say, “you don’t know what you don’t know”. When I was a management consultant at Bain & Co., clients would hire us to help them develop business strategies. Our clients were operating their business and were focused on the day to day. They were so involved in their business that sometimes they missed seeing the big picture and needed outside assistance to give them a different perspective. They didn’t know what they didn’t kn