Bulls on Parade

A little early fireworks. Color me permanently skeptical on Monday gap ups.

Anyway, Cody has the rundown on the gaps this year, over at Afraid to Trade.

So far, 45 of 61 trading days (73%) for 2008 have resulted in some sort of overnight gap .Of these gaps, 28 of the 45 gaps have filled, meaning 62% of all gaps for 2008 have filled intraday.

And back to some volatility for a sec., and the concept of calendar spreads. A typical one now maybe you buy something in the July-October time frame, and short April-May options.

So what can go right? Well, best case is volatility in the underlying stock/index stays low for the duration of your short option. You are modestly short gamma with this sort of play, so a peaceful drift near the strike you sell is your home run.

Another thing that can go right is steady options volatility. You want the volatility on the long term options to hold in place, or ideally lift.

So scratch this and reverse it to see the downside of calendars. The stock can move significantly away from the strike you played, although I would suggest always using multiple strikes on a calendar spread. In addition, the volatility across the options board can tank. Yes, you’ll do well on your decaying near terms, but you’ll get clubbed worse on the longer dated ones.

Way back when, pre-Jordan, Reggie Theus was Mr. Chicago Bull. And a big party animal. Or at least that’s what was thought, he was “Rush Street Reggie”. But later on he said alot of that was overstated, he was often home watching TV while his “reputaion” was hitting the nightspots.

Just wondering if volatility is going the same direction. They’ll keep parading guests on TV for the foreseeable future telling us that Mr. Volatility is out burning the midnight oil, meanwhile the VIX itself is sitting at home playing Guitar Hero (which as an aside, I play every 12 minutes in the week since we bought it).

While we were sleeping, the VIX has slipped below it’s 200 Day MA for the first time in half a year. The 10 Day historical volatility of the SPX, the best measure of the right here, right now has also cratered, from 37 to 20 in a little over a week. Is this the *new*normal? It may be for a bit.

Rob at Quantifiable Edges looks in the rearview at other similar moments of VIX behavior relative to the volatility of the actual market.

The one thing that stuck out to me? In every case, at some point in the next month there was a sharp drop in historical volatility. In ’87 and ’88 it took about 3 weeks. The other times it was almost immediate. Does the VIX know something? It just might.

Perhaps those uncomfortable with directional bets in the current market might prefer to use options and bet on a reduction in volatility.

Problem is though, options themselves have beaten us to the gun, they are already anticipating this slowdown.

I do believe the longer term volatility trend remains up, and the new “normal” is the mid 20’s. But it doesn’t mean it goes up in a straight line. A pause is likely upon us as Rob’s work suggests.

In other words, if all this comes to pass and we have a relatively quiet earnings month, The Punditry will just start noticing that volatility has declined right when it’s ready to lift again.

And there’s an options play for all this , calendar spreads where you buy time and sell shorter duration options. It’s a little tricky during earnings season, but I’ll by looking.

OK, if you’ve read any of the 4000 posts I’ve had on the plus tick rule, you are probably aware that my opinion is that this was just a rule change the coincided with a cyclical uptick in volatility, and not the cause of that actual uptick (or if anything, just a very minor add on to a trend already in motion).

If you just look at the Melissa pictures here, it’s 100% understandable, I would do that too. If that’s the case though, you’re not reading this anyway, lol.

Oh, back to volatility.

Capital Speculator checks out long term volatility trends in a host of asset classes (hat tip Abnormal Returns).

……we present a freshly updated chart of rolling 36-month volatility over time for several major asset classes, with data through March 31, 2008. Consider that volatility looked unusually low in ’06 and ’07, which we now know was a prelude to a reversal. Note too that trailing returns back in ’06 and the first half of ’07 looked exceptionally strong across the major asset classes. The two trends looked long in the tooth, suggesting that the cycle was poised to turn.

…..For the moment, there are no obvious signals springing from volatility, at least nothing comparable to the signs of ’06 and ’07. As such, volatility remains one more metric we watch and will continue watching, always in context with other factors, starting with valuation.

Meantime, volatility has been rising and returns have been falling. But that too will end…at some point. Cycles, in short, remain very much alive and kicking.

Steve Martin once said “those French…they have a different word for everything.Why they call soccer “football” always mystifies me. But whatever, if she wants to talk about football and show a soccer picture in the background, fine with me.

(OK, I am kidding above, I know everyone else calls it football.)

Oh yeah, back the subject at hand.

Volatility did indeed look very low in 06 and 07, and like he implies, easier in hindsight to this coming. Or rather see when the turn was coming, it was inevitable to happen at some point.

Remember time is money when you own an option, so buying a year too soon cost you coin every day. Even at the pathetic prices of the options trough, they were still overvalued relative to the actual volatility of the underlying index.

Remember also that a change in volatility cycle does not automatically correspond to a change in price trends. Volatility hit an upcycle in the mid to late 90’s, concurrent with the big bull move, and likewise peaked and trended lower as stocks did too. Now we have had the reverse; uptrending volatility and downtrending stocks.

In other words, if you perfectly pre-anticipated the upswing in volatility in 1996 or so, the play was to buy cheap LEAP calls, in 2007, it was cheap LEAP puts.

Adam, what do you make of today’s events? I was expecting a volatility lift after today’s bad news on jobs (among other things), but VIX is down 1.5%. Any thoughts?

Bob “The Stallion” Pisani

Glad you asked, and glad to hear you’re a fan, although not sure why you spell your name “Anonymous”.

Think of day with a Big Number or a Fed Meeting in the same way you would think of a stock with earnings due. Before the announcement, options volatility ticks up as the market anticipates a gap one way or another. After the earnings, the stock probably gaps, and the options tank in volatility terms. The *bet* is whether the stock gaps enough to offset the inevitable decline in volatility.

That same dynamic happens in the market. Even though the VIX acted lousy all week, it would have acted even worse had their not been a News Event on Friday. Today’s dip in the VIX is simply a modest pricing down of options now that one piece of uncertainty (the Jobs report reaction) is out of the way (and a weekend is now upon us).

Oh, and if you are a fan of Moon Bloodgood here, stil not too late to Save Journeyman.

Scratch that, it is too late.

It’s only a loss if YOU think it’s a loss

OK, it’s possible I made the above quote up.

So, Garmin, Garmin, why does that name ring a bell?

Oh yeah, someone was yapping about it yesterday.

Today I am hoping to set the table for another win by picking up some Deep-in-the-Money calls in Garmin(GRMN). The company is the world’s biggest maker of GPS, or global positioning systems, which is a satellite technology that helps identify the current location of someone or something. It also helps drivers with directions from one location to the next. Garmin makes GPS models for boats, cars and airplanes.

That’s satelite technology in those GPS thingees? I always thought it just piped me in to some guy sitting by a map somewhere. But what do I know.

So what to do?

The stock is currently trading near its 52-week low of $52.18. Wednesday’s low was $54.50 and the stock closed at $56.41. Those figures are well off the $125.68 it reached at the end of October. However, don’t count Garmin out just yet. The stock is still a good play. ValuEngine has Garmin rates as a strong buy and has assigned a fair value of about $93.

Today I will place a limit order at $21.90 to buy 10 October 35.00 (GQRJG) calls.

So let me get this straight, it’s worth $93, but we’re going to bottom fish for a $1 flip? Yeah, baby!

OK, let’s get real here. Volatility looks pretty mediocre. The stock acts like dreck. Obviously it feels better to go long GRMN now than at any other time the past year. But couldn’t you have said that over and over again? Why is this such a special time to do something bullish?

The answer is that it’s not, at least chart-wise. It was an extremely hot concept and stock. Juniper, to name one of many, looked cheap when it was $100 after trading north of $300, and it kept going down to near $10.

Does any of this preclude Lenny from snapping off a $1 win here? Of course not. But just throw a dart at any stock, pick a deep call, use fake money, and buy ten of them. And buy more if you’re wrong. Trust me, it will work 95% of the time.

I am not big on bottom fishing, certainly not for a trade, I mean you literally have to put it in the investment account and forget about it for a while. But if I was so inclined, I would sooner wait for a lift off some sort of bottom, Then fade a dip off that and use the old lows as somewhat of a stop.

Bernanke done….. and Maria whispering like she’s broadcasting from Augusta or something.

Jamie Dimon in The House now.

My big request as a taxpayer funding all this is, can we at least let these guys enter to smoke and music like relief pitchers do? And let us pick the songs? I’ll go with Ozzy’s “Paranoid”, Dimon seems like he must have been a big metal head back in teh day. Jimmmy Cayne?

Unemployment tomorrow and volatility is ……pathetic. Not just the VIX, everything I trade is trickling down. Where are we going after the news? Apparently nowhere, or so says Mr. Market.