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All posts for the month August, 2013

VIX Will See Higher Days Soon – How to Sell Volatility When There is None – Is the McClellan Oscillator Flawed?

Posted by Scott Murray on August 8, 2013
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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?

nymo88

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

VIX Rejects 14 – Markets Remain Fear-Free as They Fall – New VIX Trade

Posted by Scott Murray on August 7, 2013
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Every dip is bought, and all spikes (or bumps, really) in volatility are sold. Today, VXX put buyers or call sellers had another banner day from 11 am forward. The story remains the same, as a 1% down day in the S&P is a distant memory for market participants. The experience of a real correction is long, long ago for a lot of those now holding equities. And for some retail holders, newly out of gold and bonds and into stocks, the next one will be the first for them since 2008.

The futures are bored stiff:

Symbol Contract Month Time Last Change Open High Low
VX Q3-CF S&P 500 VOLATILITY August2013 16:43:01 13.55 0.15 13.55 14.00 13.45
VX U3-CF S&P 500 VOLATILITY September2013 16:43:01 15.05 0.20 15.00 15.43 14.95
VX V3-CF S&P 500 VOLATILITY October2013 16:43:01 16.05 0.15 15.95 16.40 15.95

Anything below 15 for September seems sort of ridiculous. There are a ton of events and history after Labor day to contend with. That is why one may be better served going in a different direction than holding naked VXX calls, not that I ever advocate that strategy. The roll will kill you while you wait, and spreading them either with calendars or verticals offers little in the way of asymmetric risk/reward. This last sentence refers to current pricing and implied volatility, which of course will change and make some trades very enticing in the VXX some day soon.

A better way is to get exposure to the September futures directly when they fall below 15. You do this either by being a futures trader (big tax advantages BTW over short-term stocks and options), or by heading to the VIX options. The VIX options for September in the money have little premium built into them:

vixoptions87

For $5750 of initial margin, Continue Reading

Volatility Will Return – It Always Does

Posted by Scott Murray on August 5, 2013
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We are getting to the point where the VIX and the futures can’t fall much more. Yet when they get this low, “much more” becomes a large percentage of the underlying. For example, while the VIX is 11.84, that one more point down represents an 8.5% fall in the front month. Conversely, would the VIX to jump to a normal 16, that would be a 35% leap. It’s a numbers game.

Add that to a 7 cent/day or so roll in the VXX, and the carnage can continue; or the jubilee for long XIV or short VXX/UVXY folks. You almost look at VXX puts and eye the total roll for the next two weeks to envision where the VXX will sit, since the market Pokies does not allow for down days of any significance.

Symbol Contract Month Time Last Change Open High Low
VX Q3-CF S&P 500 VOLATILITY August2013 16:46:18 13.05 -0.10 13.10 13.25 12.95
VX U3-CF S&P 500 VOLATILITY September2013 16:46:18 14.45 -0.20 14.63 14.65 14.35
VX V3-CF S&P 500 VOLATILITY October2013 16:46:18 15.50 -0.25 15.67 15.67  

The key here is watching September; when that bleeding stops, it is time to get long VXX in some low risk way, calendars, etc. People will fear the post-labor day, or approaching FED meeting market. But a lot of boredom, negative roll, vacation is between now and then.

Short post, since there isn’t anything to discuss when the sigma of the S&P was a couple points.

 

 

 

VIX, Futures Fall Ahead of Jobs Report – Volatility Gone for the Summer?

Posted by Scott Murray on August 1, 2013
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Markets broke out of a three week range while bonds got absolutely hammered today. This is another paradigm change as higher rates are not translating into stock market volatility. Oil surged back to the highs as well, so while these two factors are headwinds to the economy, the market does not care. Will it care anytime soon? It is certainly acting like there are no sellers and buyers on the smallest of dips, and now there is a lot of bond and gold money sloshing around with the ever present POMO cash.

I warned yesterday that VIX futures were laying out a new course of lower premiums to spot VIX and telegraphing a lower VIX and higher stock prices. Today continued that trend of lower futures and lower VIX:

Symbol Contract Month Time Last Change Open High Low
VX Q3-CF S&P 500 VOLATILITY August2013 16:32:12 13.60 -0.30 13.70 13.75 13.45
VX U3-CF S&P 500 VOLATILITY September2013 16:32:12 15.05 -0.35 15.20 15.20 14.90
VX V3-CF S&P 500 VOLATILITY October2013 16:32:12 16.05 -0.30 16.15 16.15 15.90

The VXX remains untouchable, Continue Reading