Volatility Du Jour, SPY

OK, this is actually a chart of 10 Day historical volatility of the SPY (the stock) itself, covering the last 6 month’s. It’s a very volatile and noise-driven measure that captures the here and now of actual stock volatility.

And that incredibly slow market you see on the screens? This is what it looks like in volatility chart form.

So what’s interesting about this? Well line it up with the SPY chart  and you can see the past troughs in this measure coincided with intermediate term market highs, one in late December and the other in early March. Going back further, this measure got plowed in early October and mid June, also pretty close to intermediate tops.

The last trough of mid-April has produced a big fat nothing so far. So there’s two interpretations we can run with here. One is the bullish one; this is the first time the market hasn’t topped on a volatility crash in a year. The other is the bearish one; complacency is running wild and we’re on borrowed time.

Yes, truly nothing will happen until a Fed announcement…..that will also mean nothing.

And here’s a scary thought; the VIX is right near 4 month lows and it has a pre-news bidup still in it. Guess we are heading towards Miley Cyrus levels after this “nervousness” abates.

As we sit, Rob at Quantifiable Edges channels some Larry Connors.

On Friday the S&P 500 closed higher for the third day in a row. It also made a 10-day high and closed at a 10-day closing high. I ran some tests to see what happened when you combined some of these 10-high criteria with 3-straight up days. Results of the different combinations I looked at were similar. Below is one example:

OK, you have to click thru to see the numbers, but basically the market gets a bit drifty when all that is going on.

A negative expectancy persisted up through 12-days out. The greatest part of it appeared in the 1st three days. Of course during the next three days there is going to be a Fed announcement. The reaction to that may have a larger affect on market movement than my little test. Still, it’s worthwhile noting the negative expectancy in these situations. Below is a chart showing all the recent instances with a 3-day exit strategy.

Clearly the Fed reaction could be whatever. But I strongly believe that the news itself orten means little, and particularly little this go around. It’s the reaction. We’ve rallied very nicely in the past few weeks. So maybe no matter what Big Ben has to say, the meeting will just become a catalyst for a little sell the news action?

So when last we checked with GRMN, Lenny was introducing us to the wonderful future of GPS (somehow he “nailed” a win in here, incidently as the stock tanked). Condor has had some actually usable plays in here as well.

But hey, earnings due pre-open tomorrow.

Is this a GOOG redux, broken darling that can still crank out the numbers? Or is it CROX and just broken?

Volatility high, but not all that exciting. The stock itself looks like it can carry a mid 50’s volatility, so not a real big move is anticipated.

What seems to have happened is we have had two distinct earnings seasons so far this quarter. Season 1 saw the GE implosion, followed by the GOOG explosion. And let’s throw on the VERY underpublicized big down day in high flyer ISRG the same day GOOG was flying. Season 2 then overbid for and watched relatively little happen in AAPL and AMZN and BIDU and even POT to some extent.

Now it feels like Season 3 is back to the light bidding. We noted the strange setup in XOM yesterday, and today this GRMN seems to expect very little as well. We probably need a high profile mega-move to stir the pot again. I doubt it’s either of those, but maybe FSLR is this week’s candidate?

Todd Harrison on Minyanville mentioned the withering VXO a couple times recently, so I chimed in with this.

Toddo touches on an excellent point regarding the VXO (and all the volatility sisters). The absolute number you see on the screen is only relevent within it’s context. A VXO of 19 a couple years ago when markets rarely moved 1% in a day and literally never moved 2% would have represented extreme fear. In 2008 it’s extreme complacency.

Then again, while we were sleeping, the market stopped moving. While I consider that temporary, and expect the longer term volatility uptrend to resume at some juncture, right here, right now we are a bit dormant. 10 Day historical volatility of the SPY itself hovers in the 10-15 range.

Roll it all together and it strikes me as a good time to add some “duration” to options puchases. Outer month options have declined nearly as much as nearer terms. It is difficult to time a turn upwards in volatility, but if you expect it sometime in the next 4-8 month’s, I would stick a fork in the Spring and look towards Fall and winter.

I guess the point with options is always the question of alternatives. Let’s say you have a mind to go long something. What is the best alternative, just buying stock, playing it in cheap near term calls or playing it with slightly higher (in volatility terms) longer term calls. Just my opinion, but right now I am avoiding nearer terms as I feel either stock or longer term calls make the most sense. In fact I am avoiding them so much I am legging into calendars that sell near term and buy longer term. Legging I would note takes forever given this slow trading.

Speaking of alternatives, Red Sox go into no-doubles defense on Saturday with a 1-0 lead in the 8th. Her boyfriend, otherwise known as Clay Buchholtz, gives up an inning ending easy fly ball right to Jacoby Ellsbury in right field, except Ellsbury was standing on the warning track and it drops in for a hit. Then the next guy hits a homer and it costs the Sox a meaningless April game, but more important, costs my AL Fantasy team a needed W. Clay however has parlayed his no-hitter last year into a great “stop”.

There’s an investing lesson here somewhere, something about how playing not to lose can be as costly as a more aggressive play. I’ll work on it so I can post more pics.

So if six Exchanges and penny trading is not quite liquid and flexible enough for you, welcome to the Next Big Thing in options. This, from The Striking Price.

EXCHANGE EXECUTIVES ARE lucky to have mostly completed stock offerings or sold out to the highest bidder. Their quasi-monopoly over options trading is facing tough new competition from trading systems designed for niche strategies that can be difficult to pull off at traditional bourses.

These new systems, like the electronic-communications networks that took market share from stock exchanges, are now surfacing in the options market. This could make for uneasy alliances, or prompt exchanges to spend deal dollars to limit competition.

Ballista Securities said last week that it expects to launch one of these rival systems in May. It’s likely to be well received. Ballista will let institutional investors, now driving trading volume, aggregate exchange and off-exchange trading interests that are now hidden from view. But Rome didn’t burn in a day, and exchanges won’t lose primacy overnight. For that to happen, the Options Clearing Corp. would have to start clearing non-exchange trades.

Serendipitously, the exchanges own OCC and have veto power over the rules. For now, firms like Ballista must work with the exchanges to clear such trades. (Unlike stock issued by corporations, options are created, and ultimately cleared, by OCC in response to investor demand. This makes OCC critical to the market.) But one measure of market sentiment about the OCC restriction will be the client list for Ballista’s new ECN. If big, respected institutional investors join up, that could suggest restlessness with traditional exchanges. Exchanges could be in a tough spot trying to balance the needs of individual investors against demands from institutional traders now driving fast-growing trading volumes, and burgeoning exchange revenue.

The time may be ripe to challenge the OCC restriction. Technology is rapidly changing, and regulators are increasingly comfortable with electronic markets

Well, “internalization” (firms creating flexible options products and trading them upstairs) has been going on forever, so I suppose this is just a step to formally clear and guarantee trades. Which kind of makes sense in this day and age. Think of Bear Stearns (the firm). I know it was the plus tick rule and those March 30 puts that put the firm under, but a very minor factor also was that everyone refused to take them on the other side of trades near the end. The OCC makes that sort of issue moot in listed options trading as they guarantee the trade. So this new Exchange, or whatever it is, kind of makes sense.

And will presumably add some transparancy to what is a very murky area of the options biz. A volatility move in an option class often begins with some monstrous off-floor transaction that eventually seeps it’s way to the screens. So anything that helps shed some light on this is a good thing.

Got this question in the comments earlier

So on the whole earnings-play thing…have you compared the relative merits of selling premium at different points in the expiration cycle…meaning, an earnings release with a couple days ’till expiration, vs. several weeks. Just wondering if over time they would tend to show different results…

I have never studied it, but have anecdotally experienced it. And my opinion is that an earnings report on Expiration tends to beget a larger move than one early in the cycle.

A move in motion on expiration week tends to stay in motion, be it because of earnings, the Fed, Bear Stearns (the stock) going to wallpaper, or whatever. Consider the “hand” concept. One side tends to get “hand” as Expiration gets closer and closer, and the other side must scramble. And when something is moving, option longs have the “hand”.

Now this dynamic plays out as options that seemed like rip-ups a day or two earlier get close to, or in, the money and cause a sudden squeeze on the option shorts. Earnings are a bit different in that there is premium on the board to absorb moves, thanks to the pre-earnings bid up. But that runs out at a price (see GOOG) and the squeeze is on. And the squeeze is likely more intense as more and more options become stock.

But would a plan that routinely shorts options pre-earnings do better if you avoided shorting names on Expiraiton Week? Sounds like yes, but it’s possible the market “knows” that outsize moves may feed on themselves on Expiration Week, and ergo bids higher. This I have observed anecdotally as well. Volatility tends to do poorly the week after expiration, even in names where news is expected. “Poorly” is relative. BIDU for example was bid up, but maybe the bid up would have been greater at a different time in the expiration cycle (all other factors being equal).

So yada yada yada, the moves may be greater on Expiration week, but I suspect the prices you get for selling gamma those weeks are greater as well. So net-net, I bet it’s a wash.

And with that it’s on to the NFL Draft. Let’s see, Giants are the DEFENDING SUPER BOWL CHAMPS and pick last, sweet last. Actually 31st selection , thanks to the Bill Belichek Art Film Festival. The show starts at 3PM. I’ll flip it on around midnight.