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:
|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:Â Â 06/11/2013 15:14:48
|Trade Date||Expiration Date||VIX||Contract Month|
|6/11/2013 3:14:48 PM||17.46||1|
|6/11/2013 3:14:48 PM||17.04||2|
|6/11/2013 3:14:48 PM||17.40||3|
|6/11/2013 3:14:48 PM||18.01||4|
|6/11/2013 3:14:48 PM||19.18||5|
|6/11/2013 3:14:48 PM||19.47||6|
|6/11/2013 3:14:48 PM||20.12||7|
|6/11/2013 3:14:48 PM||21.09||8|
|6/11/2013 3:14:48 PM||22.33||9|
|6/11/2013 3:14:48 PM||24.82||10|
So, just like there was after the jobs number last Friday, we could see what I call a “volatility exhale” next Wednesday, the only reason being that the Fed meeting is in the past. So, selling volatility in the form of calendar spreads or owning VXX puts could be interesting. We will discuss that next week.
In the meantime, I’ve been a fan of IWM and SPY diagonals. Here is an example of one trade I made today:
Sell IWM June 14th $98 call for .90 and buy the June 21 $99 for .92 for a net debit of .02. This is the kind of trade that works for you, as volatility is holding up the short end, right in front of massive time decay. Anything left after Friday is pure profit provided the IWM settles below $98. So far this is working to perfection. Hopefully, you end up with a runner for next week.Â Same for the SPY, 164-165 actually paid you to own it and leaves you with very little downside risk.
I also dabbled in a LULU calendar, selling June against July at $70 for $1.40.