Ratio Call Spread
As we have reported in our morning Volatility Reports, realized volatility in the broader markets are relatively low, but the VIX and the vol. products really are not moving. The only thing moving is the IV in the volatility products and those are coming in. The simple fact is that there are still buyers of OTM puts in the indexes and they are not exiting yet. Buying protection for an extended period is looking like the new normal as we head into Q2, since there is not enough of a sell off to unwind it. Tomorrow could be different of course.
Originally I was going to call the FB skew the Big Dipper but the shape of the curve is the other way. We had a little sell off today as the market finally ran out of helium and started to focus on fundamentals. FB was no different. After being a poster child for IPO busts FB has launched way above the low 40’s and is looking for new heights.
We are back to the bizarro world of bad news is good news. The housing numbers were not super great, although better than last year, but not enough to really thrill folks. So the market assumed QE is on forever I guess with the T-bill rallying. There still is short term enthusiasm for bonds amid the undeniable trend of rising rates as QE starts to wind down. As a friend of mine in college would say, "Let the funnies have their way."
Equities are going to finish with a tough week. The specter of Egyptian unrest, higher interest rates and the Fed tapering was enough to pull stocks from their lofty highs. I will say the reasons for the last two mean that the economy is getting better which should be good in the long run. In the short term the market has sold off 3-4% on the Tapering Boogeyman, so the selloff is not a total surprise.
The earnings season has been a mixed bag so far. Mark commented about it on CNBC yesterday morning and the fact that IV is not really taking off. VXX is making year lows today and the IV in the SVXY (Pro Shares Short VIX futures ETF) is making a 52 week low today. Even with VIX cash up the VIX futures compressed a bit. The only thing cheaper than the IV is the realized volatility clocking in a at 7.27 for the SPX. The low volatilities seem to set a table for something higher down the road but we will need a catalyst. The earnings season has not provid
Thursday was another record for the SPY. If you listen to the folks on TV each person on camera is trying to pick a top or look for another reason for the market to crack. That well may be as some kind of selloff is inevitable. The market looks down about .5% so maybe the pundits will have their day. Looking at the trade on the close yesterday I saw a slight change in the SPY skew. That is telling a different story.