Options Education

VIX Down, SPX IV Up

Submitted by msebastian on Wed, 10/17/2012 - 4:44pm

One of the things, we teach our option mentoring students is that the VIX is not always a trustworthy index. There are times where the index is up, and IV in the SPX is not, and vice versa. This is one of those days, and has been the case for a few days.

Here is a 3 month chart of the VIX:

Livevol (r) www.livevol.com

Notice that the index has been creeping down over the last few days. Does that mean SPX IV is down? Not in this case:

This Is What a Hedged Market Looks Like

Submitted by msebastian on Mon, 10/15/2012 - 4:26pm

I have been commenting for some time on why I do not see a sell off on the horizon. I see a fully hedged market place right now. But what does a fully hedged market look like? It looks like this:

Take a look at realized volatility on 10 and 20 day historical volatility.

Livevol (R) www.livevol.com

HV is currently at 7.9%; this is in the toilet low. In fact, when the VIX was near 14, HV was actually higher than it currently is now. The VIX is trading between 15 and 16, double the value of realized volatility.

Oil IV is Too Cheap

Submitted by msebastian on Tue, 10/09/2012 - 4:27pm

Bloomberg asked me to talk commodities today. While not my strong point, I know enough about grains and oil to have a decent discussion with about anyone. However, today was easy. Here is why:

When I was on the train coming into work, I was thinking to myself that OVX and its sister CVF have both had a bit of a rally. I was going to talk about how expensive options were getting in WTI and in USO. Then I sat down and looked at the actual vols close up. For starters, USO IV is not that high.

Livevol (r) www.livevol.com

AAPL IV Now Higher than Earnings and Product Launch

Submitted by msebastian on Mon, 10/08/2012 - 4:45pm

Many of my option mentoring students LOVE AAPL. AAPL might be heading for some real problems here in the near term. If not problems, at least some serious volatility. How can I tell? While some traders will point toward the stock breaking its 50 day and 100 day moving averages, I would point toward something else, volatility. Since AAPL stopped whipping around in the spring and bottoming out in May, the stock has had two major characteristics:

1. The stock has almost moved in a straight line higher

2. The Option Volatility has been relatively low

Today, the Option IV officially broke the high since AAPL took off in mid May:

Trading vs. Investing Using Options HPQ Revisited

Submitted by atg on Fri, 10/05/2012 - 3:00pm

The jobs market can breathe a sigh of relief today knowing that the unemployment rate dropped .3 of a percent to 7.8%. I am trying to remember the last time the percentage drop was that big, but it was quite an achievement considering the jobs numbers have been pretty anemic for months. For sure it has not happened in the last year (see my chart). My only guess is the employers were relieved that the Euro Crisis was solved and got hiring. I hope this is the start of a great trend, but of course, we will have to wait for confirmation next month.

FXE November Vol Is Cheap

Submitted by msebastian on Thu, 10/04/2012 - 4:48pm

I will be honest, I do not spend a lot of time dealing in currency options. For starters, the futures options do not have that much liquidity. This is because most of the volume is traded over the counter. The FXE currency pays a wierd dividend and has a management fee. It also is not the most liquid product; although, the front months do trade. However, when something gets out of whack, no matter the product, one should trade it.

Take a look at the term structure for FXE:

Livevol (R) www.livevol.com

Is HPQ toast?

Submitted by atg on Wed, 10/03/2012 - 4:56pm

The market spent most of the day trying to decide if the ADP payroll report was going to be a good or bad precursor for the NFP number on Friday. I could almost see the tug-of-war going on between the yes and no camps all day long. One stock where the future was not in doubt was Hewlett Packard (HPQ ). The market hated it, and the name was down 13+%.

VIX pointing Toward A Breakout

Submitted by msebastian on Mon, 10/01/2012 - 4:37pm

While I continue to be a bit of a bull, there is something lining up that will at least keep me in cash or less short vol over the next few days. The SPX has done NOHTING over the last few weeks. Realized volatility is in the toilet at well below 10% over the last 10 days and right at 10% over the last 30 days.

Livevol (R) www.livevol.com

At the same time, look at what has been happening to the VIX. It has rallied and rallied and rallied over the last few days. At this point, the VIX is trading at 100% premium to historical vol.

SPX Premium Is Probably a Sale

Submitted by msebastian on Wed, 09/26/2012 - 5:11pm

Many of my option mentoring students are saying 'is volatility back?' worried that the market might blow up. Well, I am here to explain that. Despite the news that Spain is in the news again (how that is news, I do not know), I think the market is forming a bottom. Why? Because nothing has really changed. Let’s start with this sell off:

We had:

SPX Long Calendar Trade Forms

Submitted by msebastian on Mon, 09/24/2012 - 4:16pm

As we stated on our blog Friday, the two things that really determine the success of a long calendar are buying low volatility and a tight spread. For those of you who have been at this a while though and trade calendars, it is really just this: Price. A calendar that is too cheap is likely to win, and over time, trading calendars will win big. Let me be clear, I dont mean inexpensive, I mean, cheap; in that, the calendar should cost more than it is currently trading for at a given time.