Macro Wrap – The Low-Vol Creeper Trend

by Enis February 15, 2013 7:48 am • Commentary

For the past week, I’ve been snooping around the market looking for appealing trade ideas as I always do, and it’s been much harder than usual.  It’s this endless, creeper trend.  Just a gradual tick tock that inches higher.  Why does that make it harder to find good ideas?

It all depends on a trader’s style.  Some are adept at getting long the momentum breakouts and hanging on for the ride.  Others are great trading the mean reversion strategies, logging singles and doubles along the way.  My bread and butter is identifying cheap or rich vol, and appropriate levels of support and resistance, maybe a catalyst, and then putting on the options trade that takes advantage of those views.

In the current environment, implied volatility is quite low, so the risk/reward of selling volatility is less appealing than normal.  However, realized volatility is even lower, so buying premium makes even less sense.  In fact, realized volatility has been low since Jan 2nd, and it’s a big reason why we’ve used more short volatility structures like butterflies and calendars than last year.

But when I search the landscape today, most stocks have realized lower than implied, but implied so low on an absolute basis that selling it is not prudent.  We’ve tried to get creative as a result, looking for situations where there is a maturity mismatch on the options pricing that might not make sense (the TSLA trade from Tuesday, and Dan’s BBRY trade from yesterday).  Those are good risk/reward trades regardless of the broader vol environment.

Understanding the broader vol regime is crucial to options trading.  For now, with the SPX index rarely moving 5 points in either direction, buying outright premium must have a high bar.

Markets overnight:

  • Asia was mostly red, led by Japan down 1%.  Main news overnight was the meteor explosion over the Russian Urals.  
  • Europe down 0.25% in a quiet session.  SPX futures down 0.2% right now.
  • The dollar and Treasuries higher, commodities weaker.
  • Carl Icahn disclosed a 13% stake in HLF (mostly through risk reversals in fact), and stock is trading 18% higher in the pre-market.
  • Empire Manufacturing data at 8:30 am EST, Industrial Production at 9:15 am, and UMich Confidence data at 9:55 am.