SPY

Volatility on a knife edge

Close but not quite there yet.  SPY traded 199.75 today as the 200 level hangs like the Sword of Damocles over the market.  Everything is feeling good and long equity positions are kicking butt.  In short living the good life like Damocles envisioned.  However, the sword is poised to drop if Janet Yellen cuts the horse hair on rates and down the market drops.  There is some weird tension on that tenuous horse hair of volatility.

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VIX Might Be Overdone

While I believe that the VIX is not going to 20,  I think today's move below 13% might be over done.  The VIX has not just eased off the last few days, it has borderline crashed.  Take a look at how it looks incomparison to the S&P:

Chart - ^SPX - Standard & Poors 500 Index_window_screenshot_2.png

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Is Russian aid a Trojan horse?

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We all know the story.  Troy is finally sacked by the gift of an enemy-impregnated horse the size of a house.  Browsing through the WSJ online I see an an Orthodox Priest blessing a fleet of aid trucks.  I half think there might be some Spetsnaz Commandos lying in wait in those bad boys.  With the gimpy stock market today I am not the only one.  I am all for Putin giving aid to the hungry but it is still tough to believe.

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Rattling the Sabers

I started trading options as a floor trader in 1991 right about the same time as Gulf War 1.  The runup to the war was characterized by gloom, volatility and really weak stock prices.  I think the Dow was 2300 or so.  Not much has changed in the 24 years since then through several other political crises and GW2.  The one constant has been after the USA goes in and starts shooting, stocks rally and the VIX cracks.  Until today that is, or maybe.

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VIX Buying Explodes on SPX Technical Levels

I am not one to be into technical analysis.  However, to say that they completely don't matter is probably a stretch.  For instance, up until today,  the 100 Day Moving Average was acting like a trampoline.  Everytime the S&P touched the level it would bounce.  If you think traders weren't watching the level, take a look at how the VIX would move when the SPX crossed 1913 (the 100 Day)

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Where the vol is

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This day kind of reminds me of the anticipation before walking on a trading floor some mornings.  Something is going to happen but you just don’t know what.  The first instinct is to raise the bid in the options a little bit and do some price discovery.  The corporate earnings news and economic data has been pretty good lately so the heeby geebies are not from there.

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Portugal sneezes, market swoons

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There we go stock finally had a solid down day.  No wait, that was the opening.  By the end of the day stocks retraced half of what they lost and the NDX got to just up about midday before giving some back.  It has been a while since a European entity or issue has shaken stocks.  The last one that comes to mind was the banking crisis in Cyprus that made Bitcoin a household name.

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VXN is Cheap, VIX is Not

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The VIX is trading around 12, which implies that the market is going to move about .75% a day, if it is priced perfectly.  In the last two days, the SPX has moved about .66% and over the last 10 and 20 days it has moved less than 7%

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Meanwhile the NDX moved more than 1% today and had moved on par with the SPX prior to that.  

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Are we running out of volatility to sell?

That is the question I am asking myself.  I show IV now in the 6 handle for OTM calls in the SPY.    This is on top of the SP 500 moving into record territory again.  We are moving into the realm where the upside is so cheap no one wants to sell it anymore.  Fund managers looking for extra yield are going to start selling calls in stocks if they cannot get the dollars they want in indexes.

Upside IV is in the 6 handle!

 

3D chart by OptionVision

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Is the SDEX predictive?

As we move into the FOMC minutes release VIX is down around .43 today to 12.21 at midday.  In reports past the VIX has generally held steady up to the report but 2014 is starting to look different.  The FOMC is probably going to continue to exit their bond buying routine and let the economy stand on its own.  They might even signal rate hikes sooner.  With the inflation report today it would seem the market wants some inflation.  

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