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The FOMC Rope-a-Dope

The market is not moving a whole lot today in anticipation of what the FOMC is going to decide on bond purchases.  I don’t know for sure, but something between a small Taper and no Taper.  With the House and Senate coming up with a medium term spending solution, they can squabble in relative peace trying to accomplish something.  The FOMC has surprised us for a bit and the Rope-a-Dope tactic seems to keep the equity markets pretty buoyant.

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IV Spreads in VIX are Odd

In the last few months we have watched the implied volatitly of VIX options basically implode.  Some would argue that it is a crowded trade.  I would argue that the options are finally finding a normal volatility after trading above an 80% IV for almost 3 years.  That being said, the movement in VIX options in the last few days has been extremely odd.  In the face of a FOMC meeting that many in the market are afraid of tapering and a VIX that is approaching 16 the Jan options have been unable to break 80%.

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This is IV in a Short Squeeze

For those of you following along with TWTR, this has been an interesting week as the stock has had quite the short squeeze moving higher just every day this week. The momentum trade is clearly behind the stock, and they are taking short to task.  Regarding the options,  it is interesting to watch the movement of both option IV's and term structure during a squeeze.  Take a look at a 5 day chart of Dec and Jan IV:

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There are a few things to point out in this chart:

1.  IV's rally accross the board

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The skew is kicking the other way

The market took another look over the edge today and decided to walk back from the brink.  Whatever the uncertainty of the Taper brings, the reality that the Fed is peeling back because the economy is getting better.  And as President Clinton, said “It is the economy, stupid.”  Recall the early in the week the bid for the downside was perking up.  This was the snap on Monday

 

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VIX Backwardation a One Off Event?

Today,  the big news in the option world will be that the VIX went backward cash-dec future and is essentially flat against January.  

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FXE Puts Look Like a Buy

I am not a big player in the FX market, however, I do watch the currency trust options semi-regularly.  For those that have not been following the trade between the US Dollar and the Euro, the climb the Euro has had against the dollar has been astoudning.  I would have thought the dollar would have gotten stronger against the Euro with Taper talk and stimulus out of Europe.   But, take a look at the chart:

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What will the Fed do?

Thank you to all who attended the course on Saturday.

Overall today is a quiet day after the big NFP report on Friday.  Stocks are still moving in a positive direction with the SPY just .40 or so from an all-time high.  That begs the question, is time for the FOMC to take the punch bowl away from the party?

There is never a good time to say the gig is up to a dependent party, but the Fed has to at some point.  If Congress can get a deal done like normal folks, that would go a long way to softening the blow.  VIX is up just fractionally today, about .07 which is normal on a Monday with the Weekend Effect.

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A volatility crush on the upside

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Despite the headwinds of the Shutdown and the rollout of Obamacare, employers are hiring again.  An economy that is growing and creating jobs is a good thing.  While there was some concern about the Taper, that does not look like it will happen soon.  That could change next week, but the soft landing is what the market is looking at.

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Vol drops early into NFP

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We wrote yesterday that we expected IV to come in after the NFP report on Friday.  Essentially, wait until Thursday and find a way to short VIX with limited risk.  The ADP number today was very good.  Usually that means the NFP will be but that is not a no-brainer.

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VIX futures gettin' lively

 ATTENTION:  The Options Insider and Option Pit are co-sponsoring a special one day event.  Read about it here.

A couple of days of selling and there was almost a mini-panic.  VIX traded over 15 today on the biggest run in two weeks.  While it backed off some on the close, at midday it was humming.  The thought of a good payroll report (NFP) and the end of QE3 is putting the fear into the 1800 SPX.  The last Taper fear cost us around 4-5% in the spring.

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