Daily Options Report

Want another angle on the Lack O' Volatility these days? Dr. Brett has a great one here.

One of my favorite measures of stock market momentum is a proprietary index of the number of stocks that close above (Demand) and below (Supply) the volatility envelopes surrounding their short-term moving averages. Since September, 2002, when I first began collecting these data, the average values for both Demand and Supply have been about 64, with a standard deviation of 40.

I generally think of a strong upside momentum as being 125 or greater in Demand; strong downside momentum as being 125 or greater in Supply.

Yesterday, both Demand and Supply closed the day below 50, which is a low reading. Indeed, of the 1757 days in my sample, this has only occurred 145 times. It indicates a low momentum market: relatively few stocks are closing above *or* below their volatility envelopes. That means they are closing closer to their moving averages, which in turn implies more range bound conditions.

But here's where it gets interesting. That rangebound, low volatility trade backdrop actually begets a higher volatility backdrop for the next trading day (today).

Remember that in a low volatility market, the threshhold defining a breakout should tighten. An options trader short calls, a day trader shorting a stock, et. al. have tighter parameters as they have less cushion when they're wrong. So perhaps a move beyond the "envelope" triggers quicker covering than usual (or quicker selling if the breakout is a breakdown). Expiration will only exascerbate that effect.