Short post today, as I’ve pretty much made it clear for a while where I think things are headed and what our positions are for the next two months. The focus today is squarely on volatility; if you can’t figure out what is happening by now to the global economy, then you aren’t paying any attention. All you need to know:
http://www.investing.com/economic-calendar/
Fear is not really a part of the game yet, as the VIX futures ticked a bit higher:
| Symbol | Contract | Month | Time | Last | Change | Open | High | Low |
|---|---|---|---|---|---|---|---|---|
| VX K3-CF | S&P 500 VOLATILITY | May2013 | 16:44:38 | 15.15 | 0.67 | 14.45 | 15.30 | 14.40 |
| VX M3-CF | S&P 500 VOLATILITY | June2013 | 16:44:37 | 15.95 | 0.52 | 15.40 | 16.05 | 15.30 |
| VX N3-CF | S&P 500 VOLATILITY | July2013 | 16:44:37 | 16.70 | 0.41 | 16.20 | 16.75 | 16.12 |
By now, after months of mini false alarms, the market is going to have to prove it to the downside to get the VIX charged up. That probably means getting the S&P below the 50 day and failing to get back above it. A drift downward is certainly possible. The VIX front month (VIN) and next month (VIF) month moved far more relative to the futures, but the S&P options weren’t pricing in vol like the futures were, so they were playing catch up today:
| Trade Date | Expiration Date | VIX | Contract Month |
| 5/1/2013 3:14:47 PM | 14.35 | 1 | |
| 5/1/2013 3:14:47 PM | 14.55 | 2 | |
| 5/1/2013 3:14:47 PM | 15.19 | 3 |
The VXX is holding roughly 50% of May and 50% June futures, so with the back month already at nearly 16, VXX holders are going to need a real move in VIX over the next two weeks to see a real spike. It is in no man’s land in my opinion to do anything with it. If the VIX back month could get to 18 or so, then VXX puts would come into play.
The worst days for May historically are next week, so the selling got  off to an early start. Usually, the market treats the first two days of May with kindness, yet a confluence of events on the calendar this year are making that difficult. The ECB tomorrow is expected to do more than just a rate cut, which is probably a useless tool anyway due to the under-capitalization of the banking sector there. If they stand pat, the markets could get more turbulent. Commodities took a serious beating, and like I’ve said in past columns that has some meaning, especially with the dollar not exactly a headwind today.
Outlook/Action:
Put calendar in FB for .18 at $26 for May1/May. When you have an IV spread of over 50, it just begs for this kind of trade.
Sold a DIA bear call spread at 145/146 for May for .77. The risk/reward on this is roughly 1 to 8. Looking for more of this type. Still holding IYT, QQQ, IWM, DIA, SPY, XRT, XLF, OIH puts for June. And short UTX and UPS bear call spreads. Of course, short VXX against all that.
Like I’ve said in past columns, it is very, very rare for May to be a good month when no negative month preceded it in the current year. In 1985 it occurred, but then again, GDP that quarter was 7.1%. We’d be lucky to get 1.7% this year. Who knows, the trend is not broken.
