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:

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:

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:

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.

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:

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.

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

Another day, another buy of the dip. Which make me wonder this: While ignorant pundits chastise the VIX for being dysfunctional now that we are in a bull market (not the case folks), what does the NYMO, or McClellan oscillator do for anyone? How can a market be oversold when it is a couple S&P points off all-time highs?

A reading, like yesterday’s reading of -60 is supposedly an oversold market in the short-term that has a higher probability of going higher due to recent selling pressure. This selling pressure is determined to be a more recent moving average of declining stocks relative to advancing stocks below a longer-term average (19ema vs 39ema). But here is what bothers me about this indicator:

What if the futures for a few days just open the market lower and the investors buy the dip and the market finishes slightly lower. That is not selling pressure at all. It is just the futures market playing games with opening market maker bids. In fact, this week has seen lower opens and consistent buying. In my mind, the market may be overbought in the short term, far more than people expect. This is not a conjecture on whether the market is going lower, just a request for commentary on this oscillator.

Back to the VIX. Continue Reading

The Dow and S&P touched their record intraday highs and reversed course today as bids were hit constantly between 3 and 4 pm. The Dow fell 140 points from the high and the S&P fell 12 points from its high into the close. Today was eerily similar to the May 22nd reversal that ended up being the top for six weeks. The VIX futures couldn’t have cared less:

With the VIX sitting at 13.45, this is a very narrow spread to spot VIX. It is not unique this year for the front month to be this low and the spread to be this narrow, but it is unique that this is occurring with 3 weeks to expiration. The futures are sending a message that the VIX is going to 12 or lower without any premium for unforeseen event risk. It is a very loud all-clear signal. Is this message correct? Who knows, but the futures are charting a new course here.

All year, even as the futures fell toward VIX closer to expiration, they maintained a larger spread than .50. Here is one recent example:

This was only a week to expiration, and the spread was much wider with the VIX at lower levels! This has been the pattern every time the VIX fell to this level. But the market Payday Loan action today as a reversal hammer was put on the chart did not impress anyone in vol land. It will take much more to get their attention. A convincing break below 1675 perhaps, the range for over two weeks.

Implied volatility in the VXX has plummeted. At the money call IV’s are in the 30’s. Amazing. It’s far from rare to see IV between 80-100 on the VXX. The actual value of the VXX is 9 cents lower than the closing price, just something to be aware of if you are putting a position on. The ticker on Yahoo is ^VXX-IV. Anyone should know where this stands at all times, as this is the NAV of the futures in the VXX.

What to do then? The VIX last August fell into the 13’s but the futures fell below 15 only at expiration. This is a new paradigm. The only expectation in the market right now is for lower volatility. This is while the VIX rolls into September:

VIX Volatility Index values generated at:  07/31/2013 15:14:58

Do you really think that heading into September the VIX will be 13? I don’t. At some point the futures will stop falling. The problem to solve is when to get long volatility. I’m not inclined to get long volatility right now, outside of the aforementioned calendars which really are a theta play first.  In fact every little pop in vol has been a boon for VXX put buyers. Today they made a fortune, again.

Just for reference, not that it will matter in these POMO times, August is one of the worst months for stocks historically, #10 Dow, #9 S&P, and September is #12.