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All posts for the month August, 2013

VIX and VXX Rise with the S&P 500 – Is Volatility Heading Higher?

Posted by Scott Murray on August 29, 2013
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As the Syria situation is beginning to appear like bad parents having difficulty enforcing a one-week grounding for smashing the family car while drinking and dragging, the leaders will meet at the G20 in just days, as the big players return to the desks next week with little clarity. If this blows off, there’s the job report/Fed fiasco, DC buffoonery, and just plain bad market seasonality to deal with.

The VIX and VXX rose, catching up with the after-hours futures move we highlighted yesterday. The VXX also rose on a day when the market was up, which is pretty rare. It is not rare to see the VXX fall when the market falls, but the reverse is rare. This is indicating that the futures are seeing higher future vol than the options (significant premium over spot VIX) while one must keep in mind that the three day weekend decay will do some depressing in options vol, holding down the VIX a bit. The Sep VIX future:

vixsep829

The VXX is now holding 60%/40% of September/October VIX futures, so it is important now to give as much attention to the Oct future:vixfut829

With October nearing 18, now things are seemingly reverting to the long term average for this time of year:

fallvixcycle

We may be nearing a point where shorting the ETN’s and selling puts against it will work nicely. This is a covered put. The idea would be to sell the VXX or UVXY, knowing they have long-term gravity, but in the meantime as the futures remain high, make money selling puts against the short position. This can be done for week after week in the VXX:

vxx829

Meanwhile, oil decided to make me look good just hours after yesterday’s post:

wti829

Have a great weekend everyone. The next two weeks should be fun, if not sickeningly hyperbolic and repetitive. Maybe you can invite your friends over for a CNBC taper drinking game. (Fast Money is worth 50 “tapers” alone….)

VIX Futures Recoup Losses as Market Sells into the Close – Oil Volatility High

Posted by Scott Murray on August 28, 2013
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Another weak bounce in the S&P saw selling at day’s end, reverberating after hours into higher VIX futures prices that seem to anticipate more selling tomorrow. The stock trader’s almanac shows the second to last trading day in August as very bearish, with 13 of the last 16 being down days. The Sep future mildly sold off during the day to rebound late:

vixsep828

Nobody but vol sellers won in the VXX, as both sides of the trade in the forward two sets of weeklies took it hard today:

vxx828

Crude volatility is reaching extreme levels, even though all fundamentals and seasonality are quite bearish:

wti828

So the goal is to find shirt pokies some vol to sell in WTI, as it is quite elevated. A couple ideas would be selling puts in SCO, the double short crude ETF, and selling call spreads in the USO. Implied vol is in the 90th percentile these days in both of these funds, and oil is extended. This does not imply that some near-term event couldn’t cause a significant spike, but the odds up here are less than they were at $90, and the options are pricing like it will happen:

uso828

A Sep $40-43 spread would pay over .50, and oil would have to cross $113 or so on Sep 20th for this to fail.

Volatility Rises Amid Many Concerns – VIX at June Levels

Posted by Scott Murray on August 27, 2013
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How long has it been since we had so many issues relegating investors to the sidelines? Syria, debt ceiling, Fed meeting, budget debate, Fed chair nominee (Summers-being-worse-than-Yellen risk). It was inevitable that the VIX would rise with all of these headwinds, while volume the last two days was not typical of much fear; but the VIX at 16.8 or so is not exactly screaming fear either. Therefore, vol sits in a mid range, it can go higher or lower from here. I’ve mentioned several times that a VIX at 15.25 is buy-able due to the event risk ahead, and that worked again.

vixsep827

Now it gets difficult. Is there a short opportunity? Maybe. But the main question is how the real traders react next week. And what transpires in a kind of pointless exercise we will go through to annoy but not remove a tyrant.  I put on a small calendar short vol trade using the UVXY, short the weekly $39 puts for .54, long the Sep 20th $39 put for $3.54, for a net debit of $3. I don’t really care what happens to this trade until the end of next week really, because I want to sell another week against it on Friday or Tuesday. If vol comes out this week, which would be a curve-ball, I will just close it if I get $5+.

The negative roll on the VXX is around .09/day, so the UVXY has a .18/day roll. Interestingly, unlike other leveraged ETNs, it does not hold total return swaps to generate the results, it does it with its own cash backed futures leverage:

uvxyhold827

This is a day trading vehicle and one guarantee in the life of this thing, regardless of short-term volatility, is that if you short it, you will win. The only risk is to ensure that you do not get stopped out by margin on large spikes in vol. It can easily double in a situation where the futures rise from 15 to 23. Not a stretch by any means.

So the indexes look shaky at best. You would like to see a flush to look for the swing, but that probably won’t happen with so few traders on the desks. The S&P is trying to break the 100 day moving average, which held in June:

spy827

The futures curve is reflecting higher risk and uncertainty:

vixterm827

But realistically, history this time of year shows higher average and median volatility:

fallvixcycle

So this is why you need to be wary in shorting vol right here. If the futures approach the 20 area, that is a much more attractive short vol launching point. But here is an example of a vol put (UVXY Sep $30) getting hammered over the past several days:

uvxysep30p

If the futures come back to 15 or so, this can clear $1.50 at a price of .55. But you will need what I call a volatility exhale, and it is probably going to take a Fed-via-Hilsenrath leak of the meeting outcome or a quick end to the Syrian uncertainly. Good economic data is bad and bad economic data is bad right now, so don’t look for something there to depress vol. The job report next Friday carries a lot of uncertainty (even though it has a margin of error of +/-100k jobs, so it shouldn’t), so that is just another log to throw on the fire over the near-term.

In the meantime, I grabbed a few weekly IWM puts at $100 for .44, and if the market does not follow through with downside tomorrow, I will be out of that trade. The IWM broke the 50 day after holding up better than the broader market, so it has room to fall to lower levels.

VIX Retreats as Markets Bounce – VXX, UVXY Calendar Trade Ideas

Posted by Scott Murray on August 22, 2013
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Weird day as the S&P climbed oblivious to the halted Nasdaq. Considering how many Nasdaq stocks are in the S&P 500, it was interesting that the S&P rose 6 points while the Nasdaq was offline. Most folks say that this will hurt confidence and do damage. I say no way, people will forget this and move on quickly, Main St. doesn’t care. Did the Flash Crash change anything? Realistically, like Buffett likes to say, if the exchange was closed for a month it wouldn’t matter to him, and that is how Main St. should be thinking anyway.

The S&P crossed back above the famous 50 day moving average:

spy822

The September future fell back and is almost in buy territory again:

vixsep822

One way of using time decay payment direct payday loans in your favor is to buy VXX or UVXY calendars. One trade that looks attractive would be:

Sell Aug 30 UVXY $38 for 1.75

Buy Sep $38 for $4.60. Net debit roughly $2.85.

uvxychain822

This has heavy theta working for you and you can sell against your long for 4 weeks. You could nearly pay off the long position in two weeks and get a free runner into the Fed meeting Sep 17.

The VXX offers a diagonal opportunity to get a free rider into the Fed meeting:

vxxchain822

Sell the Sep 6th, and buy the Sep 20th calls for a net debit of .06. This would work perfectly if the VXX sits at $15 on the Friday after Labor Day, then you let the long calls run.

Fed Says Nothing New – VIX Rises as Downtrend Resumes – How to Vol Trade Fed Days

Posted by Scott Murray on August 21, 2013
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Looks like a few short sellers covered in front of the Fed minutes yesterday, and at midday today. And why wouldn’t they? Every Fed event has meant a 20 point S&P rally. Once the ambiguous nothingness of the Fed minutes had been digested, the sellers got right back to liquidating positions, or reshorting:

spy821

Today you could have made the same money twice in the VXX, selling the Fed, then buying the vol dip. A few wily traders out there are lighting up a cigar today. Here is the VXX 15.5 put. If you bought it at the release, you made a double. If you shorted it right after, you had an outstanding day. This is so realistic a trade, because you know that the VXX holds all September futures in the fund right now and with all of the obstacles ahead for the market, it puts a floor into VXX:

vix15.5p821

If you’d rather use the VIX future itself, with it’s 15/4 leverage roughly, here is the same thing, as it occurred today:

vixsepfut821

It is that easy. The VXX options are more treacherous and need to be constantly managed, but this futures trade does not. You buy the future near 15 and sell it when it spikes (set a GTC to sell and walk away). That’s it. Now, you can do this with the VIX options, buying the Sep $12 or $13 call, and selling them on moves, but they have more premium and are more sluggish. An alternative would be the  in-the-money calls a couple weeks out with the VXX, because the negative roll is much less than it has been. Here is how that would have worked out:

vxxsep14call

This call is not ideal, but it gives you some wiggle-room with regard to time as you wait for a VIX spike. I almost never recommend owning VXX calls, but when the VXX is holding all of one future, and the roll is small, you get a far more efficient VIX vehicle to trade.

Anyway, the futures look like this:

vixfutures821

Not much has changed with regard to the my strategy. I’ve harped on the VIX structure for a while now, so go back and read prior articles to understand why the VIX derivatives offer some excellent low risk opportunities right now. I was in and out of the UVXY put spreads today.

I also opened up a weekly IWM put vertical spread at $101/100.5 for .10 that can pay .50 if the IWM ends the week below $101.5. I think you would agree that those odds are great considering we are less 1% away from that target. I love 5-1 asymmetry; you don’t have to win them all to stay in business.

I did one other trade, but I did not tweet it out. I sold a weekly LOW bear call spread for .72 at $45/46. Again, the risk is .28, the return is .72. Get the idea? 2.57-1 risk/reward. Essentially I’m fading a shooting star gap breakout to new highs, and I didn’t want to tweet that out, as I don’t feel great about it as the technicals are mixed. But I have a hard time turning down .72 on a $1 spread.

Still holding all the USO, AGQ, and AAPL positions mentioned yesterday.

 

Volatility Has Seasonal Base For Higher VIX, VXX

Posted by Scott Murray on August 20, 2013
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Volatility made a round trip today, albeit in a tight range between 14.25 and 15.25. The market bounced, but gave a lot of the gains away in the last hour. The Dow did not even bounce, even with HD (a DJI component) demonstrating that it has leading fundamentals in the consumer space. The stock proceed to get smacked down at the open and even had a mini-flash crash in the afternoon: hd820 This is ugly price action and if it weren’t for financials, small-caps and transports showing relative strength, today’s bounce in the S&P would have been written off as a total waste. Futures fell to nearly 15 in the Sep contract, which as of tomorrow is the entire VXX and UVXY holding: vixfut820 So for the time being, the VXX and UVXY have a solid floor in that the Sep contract will dictate their movement almost entirely. And with a myriad of potential issues lingering after Labor Day, one can not reasonably expect the Sep future to fall far below 15. (If it does, the VIX Sep $12 option is a great trade) This is what the VIX is rolling into:

vixterm820

October isn’t going to fall significantly anytime soon either. Part of the reason for their stiffness beyond the aforementioned buffoonery in Washington and Fed meeting, is a seasonal factor. Investment managers have what I call calendar risk. They will cut and run without asking questions in the fall if their year of 20% gains is jeopardized. This tendency causes the following seasonal dynamic in the VIX: fallvixcycle This a chart of the VIX over time in the 3 OPEX cycle from mid August to mid November. Day 10 is the day after Labor Day. So we have changed from a sell the rip in vol to a buy the dip. That has been working in the VXX:

vxx820

I’ve been trying to find vol trades, but we’re in a sort of no man’s land right here. I am actually thinking about selling the Fed vol tomorrow, but how much downside is there? I’d rather let the vol come out and try to get long Sep vol on a dip. Lots of stocks are breaking down, and the percentage of stocks above their 20 day moving average is hitting very low levels (hat tip http://vixandmore.blogspot.com/)

20manyse

Tomorrow may determine the short-term market direction, while the end of August is typically bullish. Let’s see how tomorrow shakes out. I’m still short crude, long a silver calendar (AGQ aug4/sep $24) and long an AAPL spread into the launch, selling weeklies against Sep2, the launch week.

VIX Subdued as S&P Briefly Breaks 50 Day Moving Average – New AAPL Vol Trade

Posted by Scott Murray on August 16, 2013
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You would think that a potential breach of the 50 day moving average would stir up some fear and put buying, but not so much. The implied vols for puts next week are 11.8 at the money and 12.2 for the last week of August. The calls are again more expensive than the puts:

spyiv815

The S&P is sitting right on the 50 day moving average. Note that pullbacks this year have ended the week after OPEX week.

spy816

The futures oddly went in opposite directions with August rising and September falling. With only two days to August expiration, the VIX and the August future will have to line up:

Symbol Contract Month Time Last Change Open High Low
VX Q3-CF S&P 500 VOLATILITY August2013 16:51:50 14.45 0.20 14.05 14.62 13.90
VX U3-CF S&P 500 VOLATILITY September2013 16:51:50 15.60 -0.15 15.60 15.75 15.15
VX V3-CF S&P 500 VOLATILITY October2013 16:51:50 16.70 -0.15 16.70 16.85 16.25

On Wednesday, the VXX and UVXY will hold all Sep futures, which enables these products to move faster if volatility spikes, since they are not holding expensive premium in the following month, that acts as a buffer to volatility rising when the ETNs hold half of each month. I don’t see a trade in these right now, as vol is neither high nor low. They could easily move higher or lower, if the S&P fails the 50, or bounces and vol cools.

The September OPEX cycle is a five week cycle, and this can mean very low volatility early in the cycle. It also means that if you like selling weekly options against the next month in calendar trades that you get another week to sell against your long position.

opexcal

I did exactly that today. Silver is breaking out and this is the traditional season for gold and silver. (see the Commodity Traders Almanac) The trade in AGQ, the double long silver ETF:

Short Aug4 weekly call at $24 for .71

Long Sep  call for $1.71, net debit $1.00.

slv816

For four weeks I can sell against Sep and the goal is to have a free runner in a few weeks. I’m also selling more expensive vol in the short call, a bit of vol arbitrage.

On AAPL, the bull put spread trade I tweeted on Icahn tweet day worked to perfection:

Short AAPL $500 Aug 17 weekly put for $13.10, long $490 put for 5.95. Net credit of  $7.15 on a max risk of $2.85. This is an asymmetric risk/reward structure and it paid the full $7.15. This type of trade is beautiful on a breakout or breakdown (selling a bear call spread), because your risk is minimal.

Now the trade (depending on Monday’s open) will be an AAPL calendar, with the long call the September 13th expiration. That is just after the AAPL launch event, so we will probably see that week’s implied vol rise as the event approaches. So you get both theta and vega working for you. The trade will be something like:

Long AAPL Sep 13th $515 call $10.70

Short AAPL Aug4 for $3.15. Net debit $7.55

The opportunity to sell against this will occur for two more weeks, last week of Aug and first of Sep. If AAPL glides higher into the meeting, this trade will work perfectly. Even if AAPL remains flat, this trade will work.

I also added a bull call spread for next week, $500-$510 for $4.00. Max risk $4, potential return of $10 if AAPL closes over $510 next Friday.

VIX Edges Higher on Market Gap Lower – Futures Not Flashing Yellow

Posted by Scott Murray on August 15, 2013
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Odd day. We have a move lower in the index to prices from July 11th, (filling the gap we spoke about yesterday) and the VIX is 14? The futures could barely rouse from their snooze to participate. Clearly fear is not part of this equation. The big winners were index put holders. My gosh, just look at what happens when implied vol is mispriced during a market that was screaming lower technically:

spy815

500% on near the money index options? I specifically spoke about how weird this was yesterday, that the implied vol was higher on the call side and the market was technically breaking down. That is pure complacency, and they opened it lower and smoked those that were not prepared. Call holders, you held too long. And put holders, where were you? This should be a chart people follow, because it tells you when risk is elevated:

cpc815

It is not a guarantee by any means that the market is in danger when the ratio falls this low, but it is part of the toolkit, like the MACD, RSI, 10 day crosses, VIX, etc.

Oddly, the futures opened one eye to check out the proceedings, which frankly were boring once the opening marks were set:

Symbol Contract Month Time Last Change Open High Low
VX Q3-CF S&P 500 VOLATILITY August2013 16:37:02 14.25 0.90 13.65 14.35 13.60
VX U3-CF S&P 500 VOLATILITY September2013 16:37:02 15.75 0.60 15.35 15.80 15.35
VX V3-CF S&P 500 VOLATILITY October2013 16:37:02 16.85 0.50 16.50 16.90 16.50

I’ve mentioned many times over the last two weeks to get ready for this, that this day was coming. It always does. And the key was to do it from a low risk position, thus the Sep VIX $12 call and the UVXY call spread. The futures ETNs only had negative roll yield left in them, but even so, buying naked calls was not the play. The Sep VIX $12 had almost zero downside.

History shows tomorrow as very bullish – makes sense after folks have been shaken out of their derivatives, no? We will look at the Volatility Wave next week to see how September typically shakes out; should be very interesting considering the historical landmines.

Tomorrow a lower open will be nearly kissing the 50 day on the S&P, so maybe a short vol, long option trade may present itself. Using Aug4/Aug 5 weekly calendars may give you a nice way to expect a bounce over the next two weeks for low risk. Or even a diagonal. A SPY 169/170 will cost you a whole 6 cents and will pay handsomely on a bounce next week.

Considering the VIX term structure highlighted yesterday, I am less apt to short vol, but it certainly could work for tomorrow or next week’s expiration. VXX put calendar for example fits this strategy. Keep in mind the structure though, the VIX is not going to fall far from here.

VIX Rolling Into October – Provides Solid Base for Volatility ETNs

Posted by Scott Murray on August 14, 2013
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Oddly enough, today the almost traditional dip buying failed to materialize, and in fact the S&P finished at the lows of the day. Regardless of how oversold the McClellan Oscillator says the market is, the relentless dip buying can take its toll eventually, exhausting buying power and creating real dips. Interestingly, the Dow is filling the gap from July 11th, when the market gapped higher simply because Bernanke mentioned in a Q&A session that he would do what he has always said: follow the two mandates of the FED, jobs and inflation. The S&P is nowhere near filling that gap at 1650-1670 from that date.

See the gap magnet on the left side of the chart:

spy814

The bearish signals are getting even bearisher, and if it weren’t for tech (re:aapl) and materials (XLB, GLD) the S&P would have rolled over and laid a solid egg by now. The trannies (IYT) and other sectors are nearing 50 day support, while the homebuilders are literally entering a bear market of -20% from the highs:

itb814

The VIX made a modest move higher to 13 (6% is modest off a 12 VIX), and it nudged the futures a bit, but certainly didn’t shake them up. We stressed lately that the VIX has little room to fall, considering the VIX structure, which now looks like this:

VIX Volatility Index values generated at:  08/14/2013 15:14:52
Trade Date Expiration Date VIX Contract Month
8/14/2013 3:14:52 PM
21-Sep-13
 13.53 1
8/14/2013 3:14:52 PM
19-Oct-13
 14.44 2
8/14/2013 3:14:52 PM
16-Nov-13
 15.23 3
8/14/2013 3:14:52 PM
21-Dec-13
 16.15 4

The VIX is now rolling into October, and you should expect these values to hang tough for a while, with so much looming in the fall. The VIX Continue Reading

VIX and Markets Remain Range-bound – New Vol Trade

Posted by Scott Murray on August 12, 2013
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For what seems like the umpteenth time in a row, the market dip was bought today, and buyers did not wait until mid-morning this time around. The futures fell slightly, yet these have been in a tight range lately:

Symbol Contract Month Time Last Change Open High Low
VX Q3-CF S&P 500 VOLATILITY August2013 16:31:53 13.35 -0.20 13.75 13.90 13.30
VX U3-CF S&P 500 VOLATILITY September2013 16:31:53 15.00 -0.20 15.30 15.45 14.90
VX V3-CF S&P 500 VOLATILITY October2013 16:31:53 16.05 -0.05 16.20 16.39 15.90

The S&P has been in a 20 point range for most of the last month, yet the technical picture is moderately negative, as the MACD has crossed lower, the 10 and 20 day moving averages are rolling over, the 10 is about to cross the 20 heading lower, and the S&P closed below both averages. But realistically, it is hard to imagine what will send the S&P lower right now in light trading and with no scheduled event risk (FED, GDP, Jobs #’s, etc.) in the immediate future. Oddly enough, the small caps were up today while the financial sector is struggling. That is a very mixed message.

sp812

The VXX and UVXY have almost flatlined for the month of August thusfar, Continue Reading