The Latest

• Happy New Year
  Posted by Adam Warner on September 8th, 2010 at 2:20 pm, Comments: 0

  

  Seems like only yesterday we were watching college bowl games on the first day of 5770, but alas it’s already a year ago. Or almost a year, I think Rosh Hashanah was later last year.

  Anyways, happy and healthy to all.  And if you’re William Shatner and you read this on your way to shul while counting your PCLN billions, may 5771 be the year you learn about options collars.

  
  

• Time For Election Volatility Hype
  Posted by Adam Warner on September 8th, 2010 at 10:25 am, Comments: 0

  It’s post Labor Day…which of course means it’s time to start over-analyzing the “prediction” markets on Intrade.

  What do they say?

  Here’s the House over the last month. The number on the right is effectively the % chance of the Republicans taking control.

  

  So right here, right now, a shade under 70%. Down a little in the past week, up on the month. And here’s the Senate.

  

  Around 30%. So the “market” basically expects a split.

  Of course out main concern here is how it effects the actual market. And despite the knee jerk on TV reaction of “Republican good”, there’s really no data that backs that up. There is data though that the market likes a split. If memory serves me correctly, the market does well under Dem president and Rep. House and/or Senate.. But in general, ignore the tele-pundits on this. No one knows what exactly the market wants, or more importantly, has priced in.

  Yada yada yada, we’ll hear a lot about election “volatility” over the next couple month’s, it gets a bit overstated in my humble opinion. I believe somewhat in the whole Wisdom of the Crowds theory, but I find the Intrade markets more reflective than predictive. Anyone can read a poll.

  What they do though is give a good window into market expectations. If you see the odds or a Republican House takeover go to 90%, you can rest pretty sure the market has discounted it by the time everyone actually votes.

  
  

• VIX Put Play?
  Posted by Adam Warner on September 8th, 2010 at 6:53 am, Comments: 0

  

  Options guru Lawrence McMillan looked at the steep VIX term structure on Tuesday, and had this to say in his newsletter.

  Perhaps more extreme, though, is the structure of the $VIX futures. As $VIX dropped sharply on Friday, the futures didn’t follow as closely. Thus the premiums on $VIX futures have ballooned even more, with the front- month (September) at 2.24, October at 6.49, November at 7.69, and January at a mind-boggling 10.34!!! Those numbers also illustrate the steepness of the term structure out through January. These are indications of an overbought market.

  The best approach appears to be a $VIX/SPY put hedge, for it has the chance to profit if the market rallies ($VIX puts will profit) or if the market collapses (SPY puts will profit). Add to that the fact that the $VIX futures are so overpriced, and the strategy is even more attractive. The question is, which month to use? It is tempting to use the farther months since the premium is so big. However, as we have found out at certain times this year and last, that premium can hang on until very late in the life of the futures. That is, if you establish the position in October, say, with a 6.50 premium, but 4.00 points of that premium is “locked in” due to demand for protective puts, then your edge is only 2.50 points – about the same as the premium on the September futures. And that September premium will be guaranteed to disappear within two weeks since the Sept futures expire a week from Wednesday – on 9/15/2010. So, we are going with the September hedge:

  Now this was before the market opened, and the VIX premium did indeed contract in September to about $1.  So I’d be inclined to go back and use October at a $5 premium and wait a little longer.

  I think his general point is important though. Those 10 point premiums in the later month’s  are especially tempting, but they’ll just persist forever, until they become near month(s).  So why bother, you’re not going to reap any benefits from futures contraction until later.

  
  

• Good Thing Starbucks Coffee Prices Don’t Depend on Coffee
  Posted by Adam Warner on September 7th, 2010 at 1:31 pm, Comments: 0

  

  Price of coffee futures keep rising. Good news though, Starbucks won’t feel much pain. Here’s the breakdown of of a cup of coffee if you believe these numbers from a few years back from EconomicsHelp

  The Price of a Cup of Coffee

  • Milk 6%
  • Coffee 2%
  • Labour 18%
  • Rent 13%
  • Admin 26%
  • Cup / sugar / lid e.t.c 4%
  • V.A.T. 15%
  • Profit 14%

  I guess it’s a little higher here since we don’t have a V.A.T. But if Lid futures explode, watch out!

  
  

• Fix The VIX!
  Posted by Adam Warner on September 7th, 2010 at 10:21 am, Comments: 0

  
  Ever hear of the Williams’ VIX Fix? Neither had I, until this weekend.  Here’s the description by Frank of Trading the Odds.

  William’s VIX Fix is a synthetic VIX (CBOE Volatility Index) calculation which can be used in any market to mimic the performance (but not the quotes) of the well-known volatility index (the WVF is not based on option’s implied volatility but derived from historical and intraday prices only).

  William’s original formula:

  WVF = [Highest (Close,22) - Low) / (Highest(Close,22)] * 100

  The concept is that when WVF gets too high, it’s bullish for the underlying. The question is how you define high. Oh, and whether there’s an actionable system using it. Frank looks at, as does Michael from Market Sci blog.

  The gist from both as I take it (they’re both great stats guys btw) is kind of expected. You can catch much of market upside while only holding a fraction of the time. Of course any strategy that works like that misses extended moves. Clearly a volatility based one will miss a low volatility,  slow motion rally that persists and persists (2005-2006 comes to mind).

  I like the concept though. The world in general learned of volatility over the past decade, and imho gets it bass ackwards. Low VIX (or whatever you use for a volatility index) is now somehow thought bullish. But it’s the old “umbrella’s causing rain” fallacy. The VIX is often low precisely because the market is doing well, it’s not causing the market to do well.

  WVF applied this way is the opposite, and imho correct, interpretation. But the real question I suppose is whether it’s better than just the VIX itself. Michael promises to study that next, so we’ll see his opinion.

  
  

• Fun With Skew
  Posted by Adam Warner on September 6th, 2010 at 10:20 pm, Comments: 0

  We posted a skew chart of SPY the other day to show that basically….there’s still lots of desire out there to own OTM puts (as well as out month VIX future, OTM VIX calls, et. al.).

  But what about individual names, do we see the same sort of behavior?

  Well, here’s a few.

  Here’s what AAPL looks like (note: all the graphs show skew on different time frames vs. the same time frames over the past year)

  

  Pretty unexceptional. I mean you have to go out to paper with more than 90 days to expiration to get to the high end of AAPL’s range. And as you can see there’s not a lot of difference between low and high that far out anyway.

  Here’s NFLX

  

  Same thing, but worse.

  But AAPL and NFLX are up stocks, so maybe there’s just not big demand for OTM puts. How about an eh stock, like RIMM.

  

  Doesn’t really look different. And here’s GOOG.

  

  So what gives?

  Well, I think it’s more evidence of the “we’re all just ETF’s” theory. The over-demand for portfolio protection is really confined to SPX , SPX puts, and offshoots like VIX products. Relatively speaking, just not as much fear that an individual name will implode as there is that the whole market will implode.

  
  

• Game On
  Posted by Adam Warner on September 4th, 2010 at 3:16 pm, Comments: 0

  

  I’ll let Reuters do the promo’s for this upcoming Round of 16 match-up.

  A ruthless Maria Sharapova whitewashed American wildcard Beatrice Capra 6-0 6-0 on Saturday to set up a mouthwatering U.S. Open quarter-final clash with top seed Caroline Wozniacki.

  OK then.

  

  
  

• Enjoy The Weekend
  Posted by Adam Warner on September 3rd, 2010 at 1:49 pm, Comments: 0

  

  VIX held above the lows from early August! Of course SPX still 20 points or so from the *highs* then.

  Who cares though. Let the record state I posted Danica’s picture and called a TBT bottom within about a week of the actual bottom. Value added, baby!

  Anyway, enjoy the Holiday.

  
  

• Right Back at Skew
  Posted by Adam Warner on September 3rd, 2010 at 9:55 am, Comments: 0

  

  Haven’t mentioned Skew in a while. So here it is, in SPY.

  This chart compares options skew (more or less the degree to which options volatility gets higher as you go lower in strike price) over different time frames. And compares it to itself.

  Long story short, skew in the shorter time frames remains at high relative levels. Which essentially says that the perpetual OTM put bid out there has not left the building. Nor has that perpetual OTM VIX call bid which basically prices off this.

  We know of course that VIX futures maintain their hefty premium So still plenty of fear out there if you look past the drifting “spot” VIX.