Andrew Giovinazzi's blog

Monday I wrote my “Backwards is no Bueno” post about the unusual action in the VIX futures and how the cash briefly backwardated with the soon to expire VIX May contract.  That activity is not very good for the market, mostly because I think it show some nerves.  Traders, rightly so, look around and see a little more uncertainty and price up SPX options.  Sometime that push over comes the normal premium in the futures, as it did for a while on Monday.  The slides below tell a continuation of that story.  For longs, it is not a great one (even AAPL got smoked today).

Europe is putting big pressure on the US equity market.  In fact, the close to close activity looks  much more benign, I think, than the intraday selling.  After watching the most overvalued security in the world, the TLT, trade to a new high for the year (and it could go higher as the Greek electorate figures out what happens after they get to replace their shiny Euros with TP), I looked at revisiting GRPN just post-earnings.  A few things were bothersome about the activity today.  First the stock opened strong on better than expected earnings (more revenue and smaller losses), close to $14.97 and then proceeds to sell off with hasty abandon after the shorts covered.  That is not a good sign for a stock.

I am thinking back to a different place, say mid March when the VIX was trading 13.66 this year.  Traders could buy calls and watch them go up.  Kind of simple really and the big reason options love a bull market (one of my favorite sayings I made up).  Low implied volatility, high gamma and pretty easy on the direction makes for lots of happy people.  The early rally this year made up for all of 2011 and at least for now looks like a near term high the market will not get back to for a while.  For the VIX in 2011, we are darn near the highs for the year.  And today went a bit backward.  

The market is getting the flush this evening, as JP Morgan announces trading losses coming out of their CIO (Chief Investment Office).  It was widely reported that this group was, pretty much, single-handedly crushing the insurance market for name CDS and other similar securities in the 1st quarter of 2012.  Now it appears that the risk management office in the bank sold a little too much prior to the recent upswing in volatility.  This is probably a good time to review “synthetics” (what JPM said they had on) and “selling volatility”, which, somewhere, it is assumed they are long. After hours, JPM stock looks down around $3.  In an iffy market like this, it won’t take much to have that crater- like opening market participants are getting used to.

More bad news from Europe, since the Greeks cannot get their act together on forming a government.  It seems they do not want to beholden to the Germans and French.  If they leave the Euro, I think, the Greeks  will wish they were.  This bailout thing that started in the mid-90’s with Mexico, went to Asia, then Russia, and now finds itself in Europe is becoming a real pain. The rule is countries cannot borrow and spend in currencies they cannot control.

Two days in a row, we have seen some pretty nutty market movement.  You would not know it though by the close to close numbers.  The best thing that can be said about the new Euro troubles is that US Equities don’t like the news, and then change their minds in a quick fashion.  For those of you new to the Option Pit blog, that little market turnaround is know as realized volatility intraday.  There are lots of ways to measure realized volatility, but the gist is that the underlying security is moving a whole bunch or not very much.  One of my favorites to trade recently  is UNG.  This is a security that went from sleepy time to quick time in a hurry.  Take a look at the intraday chart below.

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The jobs number did not come in so good.  A market that started the day down, picked up some steam on the downside, and closed near the bottom.  One name that did not come unglued was the TLT.  Treasuries are “strong like bull” and have an almost eerie feel about them.  They seem to levitate like a magic carpet.  I saw some news this week where they floated the balloon of floating interest rate bonds.  What knot head would want to issue floating bonds at the absolute low of interest rates?   I think the US Treasury should keep their gravy train running.  Now to what is happening with the TLT.  \ TD Ameritrade

Today I am going to call Bizarro Day in the financial markets.  Bond yields were up, stocks soft, gold down, oil down, and Nat Gas was up.  This recipe does not quite add up.  We can chalk it up to no one really understanding what is happening anymore or some giant fund unwinding a position.  Or, maybe, there is some extra angst on the NFP number tomorrow.  Either way, it was a strange day.  Let’s see if the vanilla market activity in FSLR is a good tell.

Oh the fun of getting picked off on a juicy news story.  As a market maker that just went with the territory back in the dark old days of rudimentary automatic execution. it always seemed like the customers knew more, and the auto-execution screen (known as “the wheel”) would spin 100’s of contracts to lucky liquidity providers in a matter of seconds.  With the advent of CNBC (yes I am that old), there was the joy of getting “Dorfed”.  Dan Dorfman was the grand old man of insider tidbits for CNBC, and leaks of his market moving news used to light up the tape.  The options exchanges actually put TV’s on the floor so guys in the pit would stop getting run over by the news.