The VXX is now holding all July futures. Here is how they stand:

Symbol	Contract	Month	Time	Last	Change	Open	High	Low
VX M3-CF	S&P 500 VOLATILITY	June2013	16:38:09	16.80	-0.19	16.80	17.10	16.65
VX N3-CF	S&P 500 VOLATILITY	July2013	16:38:08	17.65	-0.17	17.80	17.88	17.55
VX Q3-CF	S&P 500 VOLATILITY	August2013	16:38:08	18.35	-0.25	18.50	18.57	18.25

Meanwhile the VIX closed today at 16.60, which is where July basically sits, and with good reason:

VIX Volatility Index values generated at:  06/18/2013 15:14:55

Trade Date	Expiration Date	VIX	Contract Month
6/18/2013 3:14:55 PM	20-Jul-13	16.63	1
6/18/2013 3:14:55 PM	17-Aug-13	17.06	2

So the futures premium to spot July is roughly 6%. It is very possible that you could see what I call a “volatility exhale” tomorrow after the Fed meeting, just for the simple fact that it is over. This frequently occurs when there is an event that has the market’s keen attention, and because the VXX is holding all of the front month, it can move up or down a lot faster than when it has rolled a significant portion to the next month at a higher price. The farther month tends to act as a sort of an automatic stabilizer.

It would not be out of the ordinary to see a 10% move lower this week in the VXX. The market would have to cooperate and remain quiet to higher for this to happen, and a sell-the-news reaction is certainly a possibility. But with the SPY far from overbought, the MACD curling up, and price moving above the 10 day SMA, it seems to be set for a retest of the highs.

The last days of the opex cycle and the early ones of the next cycle generally see the lowest volatility. The VXX has seen many big moves lower during these stretches in the cycle. As recently as April, the VXX fell $3 as the VIX went from 17.5 to 13.5 in three days at the end of the cycle. If the VIX fell to 15 and the July future maintained an .80 cent spread to spot, that right there is $2 lower in the VXX.

VXX option chain:

The plan is to try to find a small spike in vol tomorrow to leg into the $21 puts at a lower price. The reason I like this strike is because you don’t need the VXX to move to maintain most of your capital, yet if it does you have a high delta for speedy profit. The lower strikes are not cheap, but they could pay handsomely provided the VXX moves sharply lower. The VXX puts for next week are just too expensive, even at $21. It is all about the Fed meeting on this trade.

As a sidenote, the SPY weekly puts are showing very high implied vol, so we started a put diagonal:

SPY option chain, weekly:

WIth the weekly SPY puts showing an IV of 23, the 1640 puts were sold for .85. Paired with next week’s 1630, the diagonal price was .25. If the S&P does not absolutely crater tomorrow, the short puts will evaporate into thin air and next week’s puts will be gravy to hold for a few day or to sell for a quick profit.

Interestingly, the SPX puts show lower implied volatility:

If anyone can explain that phenomenon, I would love to learn something. TIA.

We are back in those days again, when weak speculation on the basis of absolutely nothing by nobodies near a news wire can evaporate 15 S&P points in a half hour. Tape bombing by “reporters”, to either make a name for themselves, or to get paid by HFT news algorithms is a fact of today’s market life, especially when low volume allows these tactics to have the greatest effect. Amazing how journalists used to get facts and sources, now they say whatever they want. This is not limited to financial journalists, as recent episodes on CNN make it clear that facts are a secondary requirement of news.

Anyway, the VIX while fresh into its new near and next month structure, (July and August) currently sits at a value below both months, as the VIN and VIF are higher than the VIX. Sixfigureinvesting.com does a fantastic job explaining the nuances of this part of the opex cycle, and how it affects the VIX:

http://sixfigureinvesting.com/2013/05/calculating-vix-the-easy-part/

“The chart below shows the calculation on the next trading day when VIN switches to June options and VIF uses July options.  Notice how the green VIX bar is now to the left of the blue VIN bar.”

(It may have been implied by my last post that you can take the number of days and arrive at a VIX calculation weighting the August days as a negative weighting for this week and the July days at a premium using the time remaining in the respective cycle for each, but this is not the case. I won’t get into the hard specifics of variance vs. standard deviation and their effects on the VIX formula vis a vis the time factor, but Vance does this with terrific clarity in his post, referenced above. Suffice it to say that you can roughly ballpark it just knowing the VIN, VIF and where you are in the opex cycle.)

The old “volatility is here to stay” nonsense is back, and if there is one thing we know for sure, it is that it is not, because it never is. It costs money to drive up implied volatility, and it won’t happen forever. The last time it was here to stay was in December during the stand-off in D.C., and it promptly disappeared as fast as Alaska snow in 90 degree weather. (http://www.accuweather.com/en/weather-news/heat-turns-up-in-alaska-1/14371788)

The VIX futures expire tomorrow, and the Wednesday open is alway interesting to watch due to the rumored shenanigans at settlement with the opening quotes.  The VIX curve looks surprisingly normal, not far from historical patterns and upward sloping, so this volatility is not that out of the ordinary:

Symbol	Contract	Month	Time	Last	Change	Open	High	Low
VX M3-CF	S&P 500 VOLATILITY	June2013	16:15:00	16.90	-0.65	17.00	17.53	16.53
VX N3-CF	S&P 500 VOLATILITY	July2013	16:15:00	17.80	-0.50	17.90	18.19	17.65
VX Q3-CF	S&P 500 VOLATILITY	August2013	16:15:00	18.55	-0.35	18.50	18.75	18.31

Realistically, June’s volatility is below the historical average. It is important to note that the sample size is relatively small, due to the VIX’s short life. Also the relative change/expansion in option volume over time should be considered when looking at historical data. Yet even considering the moves in stocks over the last few years, 10 day HV is only 16.5%:

http://www.ivolatility.com/options.j?period=12&chart=2&ticker=SPY%3ANYSEArca&R=1

In this choppy market, diagonal spreads are dynamite trades. Here are a couple examples that we closed today, after last week’s short option expired:

SPY June 14th/June 21st diagonal call

Short $164 June 14th
Long $164 June 21st

Net debit .07, closed today for .87- 1143% return on cost. Since the net exposure was technically $1, then you could claim that the 4 day return was 87% based on theoretical total exposure/margin. But the odds of that entire $1 being at risk is very low.

Same structure for the IWM:

Short June 14th $99 call
Long June 21st $100 call

Net credit of .01, return of .34. The 98/99 spread incurred a .08 debit for a .50 return.

The beauty of these trades is that exposure is minimized, while the return could be in the stratosphere as you get a free runner after the short leg is closed or expires worthless. If I held these through today, it is possible that .87 could have turned into 1.50 or so, but who is going to be that greedy on a .07 debit when the risk is now not .07 but .87?

I put this on again today, near the highs. I just couldn’t see the S&P going higher than 20 points in front of the FED, and volume was light. Furthermore, the consensus is already talking about buying the FED meeting, so it wouldn’t surprise me one bit to see the market rise tomorrow and early Wednesday just to see it reverse.

Today’s trade:

Short SPY June 21st 165 call for $1.02
Long SPY June 28th call for .95

Net credit .07. Here is how it looks:

Perfection is for the SPY to hover around 165 on Friday, then you get a free look at the long side for a couple days the following week. But if we get a rally to 1665 or so, it is not going to do any significant damage. You just close it for a few cents and come back next week. This chart does not do the trade justice, because there are two separate paths, closing/expiration of the short put to allow theoretical unlimited profits, and closing both legs by Friday. The charting does not show path-dependent risk/reward scenarios.

The odds of cashing on this trade are very high and asymmetric to your risk. I also put on the IWM at 99/100 in the same fashion for a .01 credit. The IWM would have to make an all-time high by Friday to cause any issues on that trade. I like those odds.

If you are a believer in efficient market theory, you have a tough time defending that fantasy this year, and especially this month. Like clockwork for the second time in two weeks, the S&P rode the 10 day moving average right to the 50 day, and bounced off of it like every beginner technical analyst draws it up. It is amazing to watch frankly. The clue yesterday was the low volume drift to the 50, as if it had no real intention to break it, just to tag it.

Volatility in the near month (VIN is the ticker for CBOE near month vol) fell an eye-popping 20%:

Since the VIX is comprised of rolling near and next month vol, the VIX only fell 12%. After Friday’s close, the VIX will roll to July and August options, one week ahead of options expiraton. This is to diminish the effect of expiration volatility. Little do they realize that the most volatile days in the option cycle statistically occur the week before options expiration. And the end of the expiration cycle is typically low volatility, which of course runs counter to the nonsense you hear on TV about witching and all that blather.

Keep in mind that on Monday, the VIX will be July and a negative portion of August. The formula will be July x 1.25 – .25 August. This effect pulls spot VIX down frequently during that part of the cycle. Virtually no one knows about this effect, certainly it seems no one on CNBC has ever read about how the VIX is constructed. They are just amazed at how it magically falls for no reason.

The futures are now holding a premium to spot VIX, and in July it is a large premium, which will be the front month in 3 trading days. And that sets up the VXX for lower prices if the Fed meeting is a non-event. From what Bernanke has said over and over again, it’s pretty obvious that it will. Who knows what imaginary meaning the pundits at CNBC will devine from his plainspeak.

VX M3-CF	S&P 500 VOLATILITY	June2013	16:15:00	16.75	-1.50	18.45	18.45	16.65
VX N3-CF	S&P 500 VOLATILITY	July2013	16:21:33	17.70	-0.85	18.70	18.71	17.60
VX Q3-CF	S&P 500 VOLATILITY	August2013	16:15:00	18.40	-0.40	18.95	19.00	18.17

VIX Volatility Index values generated at:  06/13/2013 15:12:43

Trade Date	Expiration Date	VIX	Contract Month
6/13/2013 3:12:43 PM	22-Jun-13	15.41	1
6/13/2013 3:12:43 PM	20-Jul-13	16.48	2
6/13/2013 3:12:43 PM	17-Aug-13	17.13	3
6/13/2013 3:12:43 PM	21-Sep-13	17.92	4
6/13/2013 3:12:43 PM	21-Dec-13	19.17	5

So if you were holding June index puts today, they evaporated into thin air. As far as the VXX goes, it could easily see sub 19 in three or four days. This is of course provided the market takes the Fed meeting well. A $1 drop in July VIX futures will send the VXX to $19. That is a reasonable target. The VXX puts are not cheap for next week, so a better strategy may be to butterfly around $19 to get your leverage at very low risk. These puts were very active today.

Here is an example of how you could put this together:

Next weeks VXX expiration:

buy 1 $18.5 call for $1.70

sell 2 $19 calls for $1.40 = $2.80

buy 1 $20.5 call for $.65

Total credit of $.45

Here is what it looks like:

It has a roughly 2-1 risk/reward payoff, and realistically the risk is lower than what is graphically represented. With the VXX June puts at $19.5 trading for nearly .50, you wouldn’t even make money if the VXX fell to 19. Here you have the odds working for you. You could tighten the butterfly up to 18.5/19/19.5 and pay almost nothing, but then you would need to virtually nail 19 on the dot to make it work.

I sold more SPY diagonals today at 164.5/165 June/June4 for .10. These diagonals have been absolutely marvelous in what essentially has been a sideways market since May 31. They provide an asymmetric risk/reward profile.

If you can believe it, if June ended today, it would be an up month for the S&P, the eighth in a row.

Bond auctions and interest rate volatility are agitating equity markets. Today at 1pm, all eyes were on the 10 year auction, which was bid at a level not seen since last August. That caused this to happen to yields on the 10yr:

Yields fell ahead of the auction, then reversed course and finished higher. In two hours the yield rose 2.7%. As we know from the Euro charade of the last few years, rapidly rising rates cause agita in global markets. The VIX took that cue and moved higher as well, and stocks sold off.

http://www.bloomberg.com/news/2013-06-12/treasuries-decline-amid-weak-demand-at-u-s-10-year-note-auction.html

Tomorrow, the most volatile of terms, the 30yr, will take center stage, and the Street will stop to watch the results. The Fed meeting can’t come fast enough for those in the fixed income world, for nothing more than a bit of clarity and maybe some rest for soaring yields. Ben will most certainly give a “steady as she goes” bond buying pitch, and we will see what the punditry will try to extrapolate from his comments. Most of which will be imaginary.

While everybody waits for that to occur, the S&P sits precariously on the 50 day moving average. Volume was not particularly heavy, today was more of a drift down than the elevator lower:

Courtesy of stockcharts.com

The VIX has only seen four days this year at higher levels, so we could see another spike higher as the 50 breaks, or a holding pattern at high levels until the Fed meeting and then a volatility exhale. This is setting up for a nice trade in the VXX. We are sitting at significantly oversold levels, as this chart speaks volumes. Just look at the MACD; you have to go back years to see it at that level:

VIX futures are tracking spot tightly, as expiration is only four trading days away. At that point, the VXX will be holding all July, and that allows the VXX to move more efficiently with one futures contract, the front month. As the month wears on and it holds more of the following month, the later month acts as a bit of a stabilizer to spot VIX spikes.

Symbol	Contract	Month	Time	Last	Change	Open	High	Low
VX M3-CF	S&P 500 VOLATILITY	June2013	16:12:51	18.20	1.30	16.45	18.47	16.35
VX N3-CF	S&P 500 VOLATILITY	July2013	16:13:01	18.53	0.93	17.20	18.70	17.15
VX Q3-CF	S&P 500 VOLATILITY	August2013	16:13:01	18.86	0.71	17.85	19.00	17.80

All of the IWM and SPY short calls in our diagonal spreads are virtually worthless and have been closed out, so any bounce in the market before next Friday will be very profitable. It is almost time to buy VXX puts, but I feel as if there will be a better entry point this week as the S&P dips below the 50 day and shakes out some folks.

Look for retail sales to set the early tone tomorrow.

 

Higher volatility could be here for a while, primarily due to seasonal factors (June is one of the worst months for stocks historically), as well as having a high volatility event on the horizon: the Fed meeting and Bernanke press conference next week.

Of course, the punditry will be reading things into his plain vanilla answers. He will say that inflation is low (almost too low) and job growth is tenuous (he will mention the damage long-term unemployment does to an economy and that he fears pulling stimulus too early) which equals more QE, and for quite some time forward. The pundits will misread this and speculate on the end of QE which will last longer than most expect. Investors may also, which means it could cause more selling in bonds and equities, or more relief buying. Remember that calendar risk and career risk contribute to equity moves in the short-term, and there is no more nervous nelly than a manager with fees and bonuses to protect. Wonder why so many September/Octobers see big sell-offs?

So, the nerves are apparent, if not outright fearful. The VIX rose above 17 again, and the 50 day moving average sits just below. Bonds caught a bid as rates started the day higher and fell about 1%. VIX futures are right in line with spot VIX as June expires next Tuesday:

Symbol	Contract	Month	Time	Last	Change	Open	High	Low
VX M3-CF	S&P 500 VOLATILITY	June2013	16:34:57	16.90	1.30	16.05	17.00	15.95
VX N3-CF	S&P 500 VOLATILITY	July2013	16:34:57	17.60	0.90	17.05	17.70	16.92
VX Q3-CF	S&P 500 VOLATILITY	August2013	16:34:57	18.15	0.65	17.75	18.30	17.60

Volatility in the term structure of S&P options is slightly backwardated. This implies a rush for gamma, or short-term put profit/protection in the nearest expiration. You may imply this to mean that there is not a simmering greater fear in the marketplace, like an index breakdown or economic deterioration.

 

VIX Volatility Index values generated at:  06/11/2013 15:14:48

Trade Date	Expiration Date	VIX	Contract Month
6/11/2013 3:14:48 PM	22-Jun-13	17.46	1
6/11/2013 3:14:48 PM	20-Jul-13	17.04	2
6/11/2013 3:14:48 PM	17-Aug-13	17.40	3
6/11/2013 3:14:48 PM	21-Sep-13	18.01	4
6/11/2013 3:14:48 PM	21-Dec-13	19.18	5
6/11/2013 3:14:48 PM	18-Jan-14	19.47	6
6/11/2013 3:14:48 PM	22-Mar-14	20.12	7
6/11/2013 3:14:48 PM	21-Jun-14	21.09	8
6/11/2013 3:14:48 PM	20-Dec-14	22.33	9
6/11/2013 3:14:48 PM	19-Dec-15	24.82	10

 

It appears that we’re approaching a sort of “show me” moment in the market right now, where the VIX appears to want higher percentages and the S&P is nearing a support line (50 day sma) that it has held religiously since last October. In today’s algo-bot market, where the vast majority of trades are made by artificial intelligence, trends seem to last longer and technicals are heavily respected, so this may be a critical juncture for 1-3 month market direction.

(I apologize to readers for my recent absence; I’ve been dealing with a confluence of events, including the CFA exam, and food poisoning, but I should have time to post 3-5 times per week going forward.)

If the 50 day is decisively broken, a lot of folks will be stopped out, that is just the fact of the matter. They do not debate it. Whether there are others to step in on POMO faith, during interest rate volatility, and questionable macro and seasonal factors will be very interesting.

Courtesy: Stockcharts.com

In the meantime, the VIX has in my opinion been very well behaved as the S&P has fallen 80 points, or 4.7% in 10 trading days. Last year as this seasonal fall was occurring, on it’s normal May schedule as opposed to late May early June, the VIX saw levels well above 20. What followed was a summer which saw the VIX explore depths not seen in several years. So, we are at a bit of a crossroads here, IMO.

Nothing has changed frankly, except the month. Macro data is still stinky to meh, but not awful. So it is BLATANTLY obvious that the Bernanke is not even close to turning down the money machine. This can’t be more clear. Furthermore, where are rates going to go with core inflation going LOWER? Forget about core inflation, oil and gasoline are lower than last year. He may print just to reach the inflation mandate:

Source: Dallas Fed

So, futures are tracking the VIX very closely

Futures

Symbol	Contract	Month	Time	Last	Change	Open	High	Low
VX M3-CF	S&P 500 VOLATILITY	June2013	16:22:36	17.05	0.95	16.40	17.05	16.25
VX N3-CF	S&P 500 VOLATILITY	July2013	16:15:00	17.70	0.60	17.25	17.70	17.15
VX Q3-CF	S&P 500 VOLATILITY	August2013	16:15:00	18.20	0.40	17.90	18.25	17.84

While the actual VIX term structure is front loaded with vol:

VIX Volatility Index values generated at:  06/05/2013 14:58:14

Trade Date	Expiration Date	VIX	Contract Month
6/5/2013 2:58:14 PM	22-Jun-13	17.84	1
6/5/2013 2:58:14 PM	20-Jul-13	17.19	2
6/5/2013 2:58:14 PM	17-Aug-13	17.51	3
6/5/2013 2:58:14 PM	21-Sep-13	18.06	4
6/5/2013 2:58:14 PM	21-Dec-13	19.13	5
6/5/2013 2:58:14 PM	18-Jan-14	19.37	6
6/5/2013 2:58:14 PM	22-Mar-14	20.09	7
6/5/2013 2:58:14 PM	21-Jun-14	21.03	8
6/5/2013 2:58:14 PM	20-Dec-14	22.15	9
6/5/2013 2:58:14 PM	19-Dec-15	24.63	10

Notice that the front month VIX future is lower than the back month, whereas the actual June S&P options have higher implied volatility than July. So, calendar spreads selling near-term vol and owning time seem to be a potential strategy here, provided the market holds levels and doesn’t break down.

On the VXX front, the note has now just crossed 50/50 ownership of the June and July contract, so big moves higher will be hard to come by, but a significant bounce can deflate it mightily. I’ve been dabbling with June puts out 2-4 weeks at $17 and $18. As you can see, the futures are not even near threatening backwardation, and are still solidly earning negative roll.

Straight long for a bounce play, the XLF 19.50 weekly calls for next week look attractive if you feel like the 50 sma will show support.

Outlook: Vol tends to hang tough in June, as it is the second worst month of the year for the Dow and 3rd worst for the S&P. Yet, just getting by the stupid job number on Friday tends to deflate some vol by itself. I call it stupid because it has a margin of error of +/- 100,000 jobs, and pundits spaz over 10k here or there. Idiot television. Of course, they ignore the revisions, which are historically positively biased.