Rotting Apple Options

Recurring theme here, but remember back all of about 2 weeks ago when we were noting “under the hood” volatility was actually pretty strong. And masked by a weak VIX.

Well, quite the opposite now, everywhere I look I see a whole lot of cheapness. And it’s not all Energy and Mining settling into their new non-trendiness.

How about AAPL, one of the strongest stocks lately? The volatility chart here is for the past year, and as you can see, we’re not all that much above the 52 week lows as the stock itself bumps and grinds up against the summer highs.

And mid 30’s volatility is far from out of line with stock motion itself. 30 Day HV tends to bottom not much below here, while the more noise-laden 10 day reading hovers in the 30’s and 40’s most of the time (it’s about 35 now).

Yada yada yada, we’re probably in a general options rut here into the Labor Day weekend, but seeing lots of spots that look pretty cheap as fall approaches. This is one of them.

….And just an aside, but loving the Aps on my Iphone. How do “I” CNBC? Simple, I loaded up the live quotes from Bloomberg, lmao.

I’ve got a fever, and the only prescription is…..long gamma in some energy/mining names.

Now I am not in love with net-owning options in broken names. But that’s a longer term opinion. Shorter term these pups are very much in play for some sort of rinse and pop. Or whatever you want to call it.

FSLR feels particularly enticing. Options are very cheap by FSLR standards. Which makes some degree of sense when you consider that the stock has settled into a range.

But some interesting things here. It’s basically moving with the whole energy/ag/mining space right now. And has dribbled right back the to 200 Day MA. Not terribly likely it just settles in peacefully around here this week without some degree of action.

So one of my pet theories as to why the VIX just plain lags the actual Volatility Experience of 2008 is that alternative ways to hedge a portfolio and/or make downside bets are getting more and more popular. Such as Inverse ETF’s and options on Inverse ETF’s.

My cohort in options crime, Bill Luby, runs some actual numbers on this over at VIX and More.

One year ago this month, VIX options peaked in popularity. As the graphic below (click thru to view) from IVolatility.com shows, VIX options continue to trade at impressive volumes of about 100,000 contracts per day, but this number is about 30% below the levels from August-November of last year.

Part of the reason for this change in trading patterns is that some of the portfolio hedging trades formerly conducted with VIX options are now being redirected to options on double inverse ETFs. Back in February, in Interest in VIX Waning? I spoke about how the new trend seemed to favor QID options over VIX options. Six months later, the popularity of QID and SDS options persists, with QID + SDS options now accounting for approximately one third of the volume in VIX options.

And then of course we have SKF. The lower chart shows call and put volume over the last 6 month’s,’ the higher shows the open interest. And to say it has exploded is an understatement. Now it still represents a fraction of SPX volume and open interest (something like 1.5% I believe, I’m not entirely sure of the numbers). But keep in mind these are WAY higher in volatility, so the actually hedging value of these is far greater than the open interest number suggests.

Macro point here is that static interpretation of a product such as the VIX can produce misleading results. It’s indisputable that the rise of Inverse ETF’s and their options has exerted a negative tug on demand for SPX options, it’s just a question of magnitude. And as such we have to lower our subjective opinion of what constitutes a *fair* VIX in any given environment.

So we spend so much time looking at the financial end of The Trade, how about some energy?

Got emailed yesterday about some excessive put volume in XLE, so I did massive research and determined….not much there there. A customer did some sort of August-Decemeber spread, wherein he bought Decs and sold a couple Aug strikes, while buying a lower Aug strike. Or something like that, kind of went in one IM and out the other. It had no directional implication, which is pretty par for the course when you see a few specific put series trade outsize volume while the rest of the board is pretty uninteresting. And volatility hasn’t moved.

But anyway.

Volatility here, and in other energy indices, has held up better than I thought. On one hand, you can say that’s to be expected. Downtrend equals up volatility, right? In general that’s probably true over short time frames. But further out, that’s not neceessarily the case. Particularly in a bubbly sort of move that has popped. Think tech way back in 2000-01. Volatility pretty much peaked with the stocks and withered away over the course of time into the decline.

So it’s still way early. But if indeed, this is The End (of the energy trend) option volatility will likely trend lower over the course of time in this space.

The VIX is 10% below it’s SMA. The last time it sat this low in absolute terms was was June 17th.

But remember, the VIX has consistently understated the actual volatility we have all felt in 2008.

How about the SKF, the REAL fear index this summer?

Well, it’s down almost 100 points off the intraday high of 211.75 on July 15th. 30 day normalized volatility peaked that day at 131, it’s now about 80. It also sits right at it’s 200 Day MA, although I would caution that using MA’s to analyze a derivative of an ETF of an index could prove a bit hazardous to one’s health.

There’s no magical number here, the same way there’s no magical number in the VIX. But if past is prologue, the volatility drop off the highs is similar in magnitude to what happened the last time financials bottomed, in March. That took two month’s to play out though, and we’re not even 1 month into this one. The drop in SKF itself is more severe this go around, although the launch to the top was more abrupt as well.

So did we get too complacent too quickly? Put this all into the backdrop that this is August, and the default setting on options is “Sell” and it suggests volatility can continue to struggle a bit before you can really say complacency went too far.

So this is what it sounds like when Doves Cry. And highflyers get spliied out of portfolios like stale water.

POT has broken. Corey at Afraid to Trade does his triangle thing and has this.

The $190 per share level provided solid support in the past, and now that level has been broken to the downside, and there is a descending trendline ahead, which completes a possible ‘descending triangle’ distribution chart pattern.

Classical technical analysis uses price projections from the height of the triangle, which is at $240 down to $190, which would mean a possible downside target would be projected down $50 from the triangle break at $190 to be placed near $140 per share (blue arrow…..click thru to see).

I have an initial target near $165 per share, which corresponds with a test of support at the 200 day moving average (currently at $165.69 per share) and the weekly 50 period moving average at $161.89, which is flattening out).

But hey, we do options here (when we’re not monitoring backdated bottom calls). I have no position, but I like short term positive gamma in a spot like this. Particularly as it gets set to battle around the uptrending 200 day MA. Which I would note has not seen a violation in POT since July 06.

Going out in time though I do not like this as a long gamma play. It’s a broken highflyer, and now likely in a range. It’s not the type of spot that attracts me to play.