There is a pattern beginning to shape since the election and for the most part it is not good for equities. The day before the election was a near time high for stocks and the market has not sniffed that again. The European situation is mostly the same so I don’t think it is there. The problem is here and what all market participants fear which is the total inaction of the government to get its house in order. Mind you I don’t think it is a 1250 SPX type problem but more of a slow melt until a resolution and most likely a rally. The morning economic news is a little brighter each day followed by a steady selloff after any politician opens their mouth.
By tomorrow night I am not going to miss all the election ads and political screeds brought forth from the Super PACs and the not so Super PACs. This time 30 hours or so from now some decisions will get made on who rules for the next 4 years. I am guessing the Fiscal Cliff solution will happen by Jan 1st since we cannot keep the $ 1 Trillion of spending going forever unless this country wants to emulate the cradle of democracy, Greece. This brings me to trading the FXE.
The market finally got the selloff it wanted. We had steeper put skews and relatively elevated volatility, so the volatility markets were right. This was one of the first weeks Option Pit did not have a short VIX/VXX play in our Strategy Letter (that might change Monday) over the last 2 months. But if I asked you right now if the SPX was up on the week, what would you say? The SPX is up about 5 handles from last Friday, and the VIX is up near a full point. The market was up and volatility was up for the week, so let’s see how long that will last. One place the volatility was up was Gold.
One of the frequent questions we take in the daily pit report during earnings season is if premium is a sale into the earnings announcement. Usually we take these on a case by case basis, but one of the best ways to evaluate this is by taking the front month options and turning them into a pure play on the event.
As I was sitting down to write the blog today, I have to be honest there were about 3 different things that I wanted to write about. However, they are either inthe Option Pit Strategy Letter, written for TheStreet.com Option Profits Team, or in the hopper on something I want to trade that I don't feel like giving away yet (If there is a trade idea we like, there is a delay between the blog and when we talk about it internally).
For those of you not paying attention today, despite the slow equity markets, there is a market where things are really moving around: Grains. Both SOY and CORN are getting smoked today. Corn is down limit, and Soy is off as well. Yet, what is interesting is that, despite an apparent break out today, option prices on the futures and, subsequently, the ETF's are still pretty low.
Generally speaking, I think my take on which direction the market has been heading is about as good as anyone else's(and by that, I mean worse than a monkey throwing darts). However, there are times where I feel certain about my market inclination. Right now, that inclination is up, and I will tell you why.
One of the important factors that I follow is the price of the VIX relative to the SPX. When the VIX is in decline, but not at a low, while at the same time the SPX is right at an all time high, my general belief is that the SPX is going to go higher. We are in one of those scenarios right now. Take a look:
Many of my option mentoring students were wondering about the move priced into GRPN options today. The stock 7.5 dollar stock, into its earnings had an incredibly high volatility, almost all of it priced into August options that expire tomorrow. We can clearly see the vol pump in GRPN Aug in this cut out fromOption Vision (a new analytic tool we will be using here at Option Pit with some regularity).
Famous last words from many of my option mentoring students, when they are dabbling in selling premium into earnings. Well, those option traders are typically given a tough education about options in short order. We saw this happen in tall order in PCLN options. Take a look at the closing price of the weekly straddle: