SPY

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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Did volatility hit rock bottom on Friday?

At least for now VIX hit rock bottom on Friday.  There are several components to the volatility complex and VIX is just one of them.  As far as the volatility futures are concerned they did break lower today for a while.  VXX, which is made up of volatility futures, touched below $30 to record a new low for the year.

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SPY IV is getting hit hard as Memorial Day is celebrated a bit early

The Fed whispered it is looking at raising rates and we rallied.  Why?  Because higher rates mean economic growth and that is ususally good for stocks.  The question is really more out into 2015 but still the Fed mandarins are kicking it around and we rallied.  VIX got hit.  IV got hit.  Stocks felt the love with another run at a record probably a day or two away.

Stocks love certainty and a path for rates makes investors believe that things can get better.  We already highlighted the crazy term structure yestery in VXX and it is happening in SPY today.  The difference is that we are coming into the holiday and the liquidity providers are taking out the 3 day weekend faster than the US Army can take over Iraq.

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I guess that NFP number still matters....sort of

The stock market looks like it has had enough of tepid job reports.  There were big hopes of 275k plus jobs, but all of those hopes were dashed today.  The happy number was private payrolls are back up to the pre 2008 crash highs.  I guess that means government payrolls are not, but somehow we are spending a whole lot more money than we were back then.  Either way stocks were a bit grumpy about it.

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No Weekend decay today

Stocks made a little rally today on the good economic news in the morning.  Much of the early gains went away as the day wore on.  For what seems like the 5th time this week, the VIX cannot hold the lows of the day into the close.  As I write this, with 30 minutes to go today, the sub-14 VIX came and went with the slow deterioration of sentiment.

Where did it come from?  To keep with the story of the last couple weeks, the OTM puts continue to attract the attention of premium buyers.  Maybe the Russian’s massing on the boarder has something to do with it but there is still a bid for OTM IV going into the weekend.

 

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Market can't get past it's worries

Stocks sniffed all-time highs again and pulled back from the brink.  The simple answer is there is no reason to be running at all-time highs.  That was enough to push stocks back off of their shiny new plateau.  Since we are a volatility shop, let’s look at the underlying currents.  The first stop is SDEX, it's still at nosebleed levels.

Charts by google finance

Next, if you look at the 3D skew ATM IV is coming in but the further one moves OTM, the rate of decline seems to taper.  That would be the highlighted row moving right to left.  What that means is there is a lack of willing sellers of downside puts.

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