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The market had a bit of a reversal on Thursday for what reason I cannot quite figure out.  Maybe politics but the economic news all week has been ok. Today there is the big shrug on the Sequester so maybe the politics will start to seep out of the market. One could hope. One name that took off on the close yesterday was Facebook (FB).  FB spent most of the day in the mid-26 level only to ignite on the close to close 27.25.  It was like all the sellers went home after the whatever deal was announced with MSFT.  What it left at the end of the day was a really flat term structure.

As I write that little gem it was one of the first things I learned as a market maker.  To be more specific what I learned and what I taught was as a market maker you make the paper pay for your uncertainty.  If the tape is starting to go to a place you are unsure of, raise the volatility.  That is a mantra I always go with.  We spend a lot of time in the Option Pit Gold Courses trying to teach our students how to read the tape.  The “tape” is the price and volume action in any particular time period.

Yesterday, on Bloomberg TV I discussed an iron condor trade on PCLN into earnings.  Very rarely to I like playing earnings moves.  It can be a mess (see my AMZN trade).  But, I thought the IV was cheap and that sometimes IV is cheap for a reason, and that the market was expecting PCLN to move like EXPE which did almost nothing.  Watch the Video here:

As Bill Luby reported on his blog VIXandMore.  VIX option volume and call volume both set records today.  Which leads us to this question?  Why?  There are two potential answers:

1.  The Market is about to tank and smart money is covering their butt

2.  The large stock funds are scared, and hedging their portfolio's

Lets pull up a 1 year chart of VIX.  On the top are the levels of VIX and on the bottom is call and put volume.  I thought it would be interesting to look at past volume spikes to see if they are a potential leading indicator.

Justin Braun is the CEO of Scaled Dynamic (an advertiser).  He is writing a guest blog on using his platform to potentialy trade the YEN.

It is news when the VIX cash settles at a level that is higher than the VIX futures.  I think it is an even bigger deal when the VIX settles above 6 futures contracts like it did today (almost 7, actually).  Yet, there was something that was also interesting about today, the movement in the VIX futures themselves.  While the futures certainly reacted to the news,  the entire curve really didn't flatten up very much.

www.vixcentral.com

Well here we go again… or maybe not.   Italians go to the polls this weekend and surprise Silvio Berlusconi has a shot of upsetting the apple cart and turning Italian politics into more of a farce than our politics.  Not that he can win per se but setting up the European style coalition is going to be tougher.  It might be a tempest in a teapot but market watchers are tired of useless politicians a bit more than normal lately and the thought of Silvio back in the game has folks spooked.  At least it has the volatility markets taking notice.

Today we had good old fashioned follow through and as I write this the market is only down small on the day.  VIX made a power move only to 16.27 and it looks like it will close in the low 15.20s.  There is now doubt the market can change direction in a heartbeat if necessary and 1500 in the SPX looked like the sticky area.  A stock that performed well all day was Boeing so let’s look.

One of the apparent things in a low volatility environment is how fast volatility can turn the other way.  The Fed announced some split sentiment moving forward on what to do about the latest round of bond buying.  The improving news in the housing front was largely overshadowed by what appears to be some differing opinions in the minds of the Fed governors.  Either way the market did not like the news very much.  Neither did gold or oil or anything that has an inflationary long delta attached to them.  Market players were looking for a reason to sell off and a possible end to bond buying looked good enough.

One of the things we concentrate on in our option mentoring is trading indexes.  There is plenty to be made in the index space, typically on the short premium side.  In the case of all the indexes IV has been overpriced for so long,  all the way down to these levels, and continues to be overpriced.    Index IV has been overpriced for going on a year and half and there is no end in sight.  Perhaps the worst offender is NDX, especially in the past few weeks.

Take a look at the way the Index has moved since the beginning of the year, or more...HASN'T moved.  

LivevolX www.livevol.com