We watch IV's of the SPX and many of its securities like a hawk. Our goal is to try to find patterns that emerge in the volatiltiy markets that can potentially make money. One that we have noticed internally and began to trade off of, in the strategy letter, is Goldman Sachs. Traders have a bad habbit of overselling the premiums coming out of events and after big moves. This is almost always a mistake. Take a look at the pattern of GS when the IV drops below 15%.
As we all know, vol can go anywhere, but is unlikely to stay there. While HV can touch into the low single digits for short periods of time, it doesn't stay there long. Take a look at a 2 year chart of 10 day HV and 30 day IV
Stocks are going to make a closing high today or near it as I write this post and I can’t help but think we would be way higher if Vladimir Putin could make up his mind what he wants to do in the Ukraine. We know what he wants to do, take a bunch of territory, but the Europeans are still threatening sanctions. That is keeping the VIX into another elevated close and vol. futures bid.
After the record run to all-time highs stocks are stuck today while the violence in the Ukraine continues. We have highlighted the 5% realized vol in the SPX and will not rehash that but stocks are setting up to go somewhere. A name that has been setting up to go somewhere is YHOO.
The stake in BABA has really driven the value in YHOO’s shares recently and the name has been in a range from $33 to $38. It is now at a 3 month high as BABA just released a decent earnings report as it sets to IPO.
I like working at Option Pit with Mark Sebastian and I like our clients. Well one it is fun, most of time, and we have great clients. From time to time we get some solid observations from them. That is another thing I like. Having a different perspective from traders you have helped educate usually means some interesting stuff know the foundation is solid. So I am giving one of our clients some props here for this one. He knows who he is.
Note that when realized volatility dips below 5% on a short term basis it usually does not stay there for too long. I have 10 day RV down around 5.41%. Right now the first 3 Weekly terms in the SPX are all below 9%.
I understand there is a major difference between straddle price and actual movement, because most pricing models assume dynamic hedging. The SPX is now 2000.00, does anyone see the disconnect in the weekly straddle price? Take a look at this trade ticket:
The blog post that really broke out our blog was this one involving Time Decay and the Weekend (we will always have a special place in our hearts for Bill Luby pushing it out). To sum up the post, we explained how market makers 'moved the clock' on their machines to bring implied volatiltiy down with out screwing around with their actually vols they were running. The basic point is that market makers take weekend decay out over a few days at the end of the week which causes VIX to drop on Thursday's and Friday's and to rally on Monday's.
Close but not quite there yet. SPY traded 199.75 today as the 200 level hangs like the Sword of Damocles over the market. Everything is feeling good and long equity positions are kicking butt. In short living the good life like Damocles envisioned. However, the sword is poised to drop if Janet Yellen cuts the horse hair on rates and down the market drops. There is some weird tension on that tenuous horse hair of volatility.