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.
Most of the week saw sideways action in the major indexes. As I write this the S&P 500 is set to close around unchanged. There were too many cross currents in the global front messing with the mostly positive news domestically. With the S&P 500 at multi year highs the news is going to have to get a bit better for us to rally to new levels. A big Yen devaluation and slowing European growth are not going to pave account statements with a new path to riches. Neither macro issue was a surprise which is why the market shrugged it off a bit. The VIX however is going to close the week in the 12 handle which it has not done very often. Usually we have enough of a selloff in stocks to send the VIX back up. Not so this week. The fact t
STZ was up very hard on the InBev, Modelo Deal rallying 37%. But, I question whether the deal is 100% a go based on the option trading today. Traders were jumping over themselves to buy puts in STZ today. Check out the volume in March:
One of our Pro Clients had a funny quote in the Pro Chat today. He said, "The S&P 500 is up today. You don't see that every day. Oh wait a minute, yes you do." In a nutshell, that is what we have, a market that is finding new ways to rally on news like the better deficit numbers and greater bank lending.
Something that has been missing for a few years is finally starting to come back into the market. That something is buyers. Option volumes had a rough year in 2012 as most retail investors sat out and watched the politicians and governments pitch fits at each other. The last bull cycle in the 1990s was built on stability coming off of the Savings and Loan Crisis. Remember that? The problems from 2008 and starting to recede from the front of the financial pages but the public is only starting to think beyond it. It would be hard to say stability is back but it does feel better. I want to look at Friday’s rally in AAPL.
Last night in my webinar for RCM I discussed how I will use the VIX as a multi day indicator for trading. One of my key points, is that if the SPX is higher over several days, and IV is also higher, or not falling over several days, then IV is pointing toward a possible sell off. If we look at what has happened over the last few days, we can clearly see that IV is not really dropping and SPX is rallying.
While the VIX itself might not be doing much, demand for options has actualy increased in one area, far out of the money puts. The CBOE SKEW Index measures the expense of far out of the money puts relative to nearer the money puts. It has been taking off since the beginning of the month. Take a look at how it has moved over the few weeks.
With the market mostly moving sideways today I thought it would be more interesting to look at the activity in MCP. McGraw-Hill is the parent of Standard and Poor’s and has just been unfriended by the Justice Dept. Four years later someone is getting around to blaming the one of the ratings agencies for their calls on the mortgage securities under their watch. Why the other ones are not in the suit is interesting but MCO’s stock is in the basement too. The market seems to think it is coming. Let’s go with the news we have and interpret the reaction.