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Halftime Report 2.4.2013

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A disappointing report on US Factory orders, helped the Dow move lower while all ten groups in the S&P 500 fell at least 0.4 percent, with Chevron (CVX) down 1.1 percent and Wal-Mart down 1.7 percent, leading the decline. This drop off could be merely based on people taking profits from a stellar January, however the markets, specifically the S&P 500, could be a bit overvalued, based on the slow economic recovery. The VIX did jump 13 percent today to 14.53, and is sporting the biggest gain on the year so far. The Euro also looked sluggish and slipped from recent highs against the dollar and yen on political uncertainty in Italy and rising unemployment in Spain.

 

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Low VIX Strategy & Skew Play (VIX, VXX, VXN, SPY) 10.19.2012

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From the prospective of an options trader, one should know the basic categories of being a net premium seller vs a net premium buyer. Each category clearly has is pros and cons, but it more or less could debatably come down to one’s volatility forecast. It is popular, for example, to fade the implied volatility pump pre-earnings; for uncertainty rules around catalysts. Then as the event comes and goes implied volatility collapses and traders cover their short premium. The former is very dependent on a good risk reward ratio, forecasted IV crush, and underlying asset…but it is all based around volatility.

The five-year (#Fibonacci) average of the VIX (252 trading days in a year x 5= 1260) over 1260 periods is around $26.00. This is roughly 60% from current levels, but it is important to remember that when the VIX decides to move, it really moves. The last time we were at a $26 VIX was in June 2012.

Large trades in the VIX seem to confirm this upside potential. Big players were trading the upside call skew in November, more specifically, the NOV 23/28 1×2 call spread. This is taking advantage of the upside bid in the VIX calls, for this trade takes in a small credit by selling the short strike of a long call spread 2x. It profits big in-between the strikes, but profits start to trail off after 28, should the VIX really explode by NOV VIX expiration.

Equity option strategies that would most likely profit from this kind of VIX scenario include the loved & hated gamma scalp. While Greeks are obviously important here, the concept is really simple. Long straddles fluctuate, benefiting from volatility, then as one side of the straddle profits, traders sell or buy stock to neutralize their deltas as the straddle becomes delta bias toward the winning side. As the stock moves up and down, small profits are made via scalps; offsetting time decay. The challenging part of this strategy is when to neutralize said delta along with scanning for a good underlying. Scanning for a stock with not too much IV, but with just enough bang is what most find challenging, for if volatility or the stock does not move, this strategy is crushed.

Feel free to e-mail any comments, feedback, suggestions, or general inquiries to…

Author

mark@keeneonthemarket.com

MarkVIX

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Market Recap 8.31.2012

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Metals and energy rallied on Bernanke’s announcement that though no action will be taken now, the Fed will be ready to act should economic conditions worsen.  His comments are reminiscent of remarks he made in 2010 from Jackson Hole where he strongly hinted at the possibility of QE2.  Crude moved up $1.73 closing at $96.35.  Natural gas rallied nearly 2% closing at $2.801.  Gold surged higher closing up $36.60 closing at 1691.40.  Silver moved up 4.18% closing at 31.72.

Volatility was down today with the VIX falling a little over two percent closing at 17.47.    

The story of the day was the Bernanke speech.  Although he made no explicit statement about what action they would take if the economy deteriorates, the consensus is that it will almost certainly be another round of asset purchasing.  Markets rallied after the implementation of the first two rounds of easing but markets are concerned over the effectiveness of further easing.  Analysts expect that there the likelihood of easing is now very high and that we won’t hear another announcement of significance until around the election. 

James Ramelli University of Illinois graduate in finance Email: james@keeneonthemarket.com, Follow @Jim_KOTM