For what seems like the umpteenth time in a row, the market dip was bought today, and buyers did not wait until mid-morning this time around. The futures fell slightly, yet these have been in a tight range lately:

The S&P has been in a 20 point range for most of the last month, yet the technical picture is moderately negative, as the MACD has crossed lower, the 10 and 20 day moving averages are rolling over, the 10 is about to cross the 20 heading lower, and the S&P closed below both averages. But realistically, it is hard to imagine what will send the S&P lower right now in light trading and with no scheduled event risk (FED, GDP, Jobs #’s, etc.) in the immediate future. Oddly enough, the small caps were up today while the financial sector is struggling. That is a very mixed message.

The VXX and UVXY have almost flatlined for the month of August thusfar, Continue Reading

Another day, another buy of the dip. Which make me wonder this: While ignorant pundits chastise the VIX for being dysfunctional now that we are in a bull market (not the case folks), what does the NYMO, or McClellan oscillator do for anyone? How can a market be oversold when it is a couple S&P points off all-time highs?

A reading, like yesterday’s reading of -60 is supposedly an oversold market in the short-term that has a higher probability of going higher due to recent selling pressure. This selling pressure is determined to be a more recent moving average of declining stocks relative to advancing stocks below a longer-term average (19ema vs 39ema). But here is what bothers me about this indicator:

What if the futures for a few days just open the market lower and the investors buy the dip and the market finishes slightly lower. That is not selling pressure at all. It is just the futures market playing games with opening market maker bids. In fact, this week has seen lower opens and consistent buying. In my mind, the market may be overbought in the short term, far more than people expect. This is not a conjecture on whether the market is going lower, just a request for commentary on this oscillator.

Back to the VIX. Continue Reading

The Dow and S&P touched their record intraday highs and reversed course today as bids were hit constantly between 3 and 4 pm. The Dow fell 140 points from the high and the S&P fell 12 points from its high into the close. Today was eerily similar to the May 22nd reversal that ended up being the top for six weeks. The VIX futures couldn’t have cared less:

With the VIX sitting at 13.45, this is a very narrow spread to spot VIX. It is not unique this year for the front month to be this low and the spread to be this narrow, but it is unique that this is occurring with 3 weeks to expiration. The futures are sending a message that the VIX is going to 12 or lower without any premium for unforeseen event risk. It is a very loud all-clear signal. Is this message correct? Who knows, but the futures are charting a new course here.

All year, even as the futures fell toward VIX closer to expiration, they maintained a larger spread than .50. Here is one recent example:

This was only a week to expiration, and the spread was much wider with the VIX at lower levels! This has been the pattern every time the VIX fell to this level. But the market Payday Loan action today as a reversal hammer was put on the chart did not impress anyone in vol land. It will take much more to get their attention. A convincing break below 1675 perhaps, the range for over two weeks.

Implied volatility in the VXX has plummeted. At the money call IV’s are in the 30’s. Amazing. It’s far from rare to see IV between 80-100 on the VXX. The actual value of the VXX is 9 cents lower than the closing price, just something to be aware of if you are putting a position on. The ticker on Yahoo is ^VXX-IV. Anyone should know where this stands at all times, as this is the NAV of the futures in the VXX.

What to do then? The VIX last August fell into the 13’s but the futures fell below 15 only at expiration. This is a new paradigm. The only expectation in the market right now is for lower volatility. This is while the VIX rolls into September:

VIX Volatility Index values generated at:  07/31/2013 15:14:58

Do you really think that heading into September the VIX will be 13? I don’t. At some point the futures will stop falling. The problem to solve is when to get long volatility. I’m not inclined to get long volatility right now, outside of the aforementioned calendars which really are a theta play first.  In fact every little pop in vol has been a boon for VXX put buyers. Today they made a fortune, again.

Just for reference, not that it will matter in these POMO times, August is one of the worst months for stocks historically, #10 Dow, #9 S&P, and September is #12.

Watching the last two weeks, one might certainly get the impression that August will be a snoozer. Especially after the last two weeks have seen virtually no movement on any front. (outside of individual earnings-driven names) The S&P is virtually unchanged from July 15th and is trading in tight ranges. Volatility is quite subdued and the VXX has remained flat over the last week, as the spot to August premium has dwindled, while still having over three weeks to expiration of the August contract.

If there is going to be any volatility in this opex cycle, it should be soon. The small caps are rolling over (IWM MACD cross to the downside), the transports (IYT) are looking to retest its 50 day, and the SPY is looking to cross over as well. There are numerous signs of weakness, but with trading so light it may not matter.  Let’s take a look at the Volatility Wave for August:

We are on day 6 here, and the pattern for volatility shows a tendency for vol to rise beginning this week after doing nothing in the first week, which is very typical for the first week in most cycles. Clearly, any volatility will hinge on the FED, the constantly over-hyped and very misunderstood jobs number on Friday, and the GDP print on Wednesday. GDP is expected to be terrible, so a bad number probably will have no effect. A very good jobs number or FED language could restart the taper hysteria, but it certainly seems that most of those shocks have already been felt, and could be muted.

The futures will probably hold up for a bit, as September is notorious for negative action and August premium to spot VIX is around 1 with 3+ weeks to go. So outside of roll (roughly 5 cents per day) there is not a lot of downside to the VXX, as we have been suggesting over the last few posts. Keep in mind that the VIX itself is rolling into September, so it will probably not fall to the 11-12 area. Spike risk has reduced a bit, solely due to the fact that September now represents a larger portion of the VXX, soon to be over 40% in the next couple days.

There aren’t many trades in the VXX right now that have a distinct advantage from a risk/reward perspective. Buying calls is a waste generally, but selling them in verticals is not offering a favorable trade either. Here is one of the few ideas that will work if the week is uneventful:

Short VXX August 2nd 15.50 for .42

Long VXX August 9th for .62

This calendar works best if the VXX just sits here and rolls. Then on Friday you will be left with the August 9 calls which will be worth .40+ and you only spend .20. The risk on this trade is less than the .20 you are putting up as the deltas are roughly similar. Not much can go wrong on this trade. A spike in vol is covered with nearly equal delta, and falling VXX will leave you with more than .20 at the end of the week. I will probably put this on tomorrow.

Here are the IWM and IYT bearish set-ups. I went long a small IWM weekly 104/103.5 put spread for .25 that will pay 2-1 if the IWM closes below 103.5 this week.

The end of the OPEX cycle and the beginning of the following one frequently demonstrate the lowest levels of volatility for the cycle. As the market has moved completely unabated to higher levels, the VIX has receded to levels reminiscent of the mid 2000’s. It has only spent 3 days below 12 in 2013, and these levels have preceded significantly higher volatility. I suppose that the summer could see a continuous run higher in the S&P every single day, but the odds would be against that.

On April 15th, the VIX rose from 12.06 to 17.27. While I certainly am not suggesting that will happen, one must be aware of the possibilities when the VIX is this low. Because this level of volatility generally precedes higher vol and not more of the same, it behooves one to look for ways to anticipate what most folks are not right now. One month ago, volatility was “here to stay”, and it was obvious that it was not. Now low vol is expected by the punditry with no hiccups in the market until September, because their memory is about a week long, unless the pundit is a perma-bear expecting the next trip to S&P 666.

The futures:

The spread of August to spot VIX is over two, but keep in mind that the VIX futures have an extra week this month, expiring on August 20th, after OPEX. This will hold up that front month premium a bit longer. But it must be noted, that the VXX holds 85% of the front month right now, so if there is action in the marketplace, the VXX can move quickly, without the next month’s extra premium to buffer the rise in the VIX.

I expected a flat to higher VXX over the next OPEX cycle, and that there could be volatility as early as this week. There are no signs of that yet, but if July contains no downside volatility, the S&P will register the largest monthly advance since a 10% bounce in October of 2011 following the debt debacle crash. So in essence, this would be the largest monthly gain in the S&P 500 since 2010 that didn’t follow a major correction. So instead of sending me emails about how I have been wrong for the past whole 3 days, look at this chart and make some of your own assessments:

VIX Volatility Index values generated at:  07/22/2013 14:58:02

The VIX term structure is very low, considering the history of the market in September and October. At the money September SPY puts can be purchased for 2.2% of the current index price. Some very attractive spreads can be constructed at these prices.

Oil reversed and closed lower than the prior day’s low on unchanged volatility. That is very interesting, considering this was the first time since June 21st that this occurred. The put/call ratio was 2 to 1 in the USO, the basis for the OVX, or the oil VIX. The implied vol sits in the bottom third of its 52 week IV percentile, and that is at these lofty levels. I continue to believe that the puts on the USO and UCO remain bargain priced right here. Long UCO $34, $33, and $31 August puts.

I also initiated a long SPY put spread, August 2nd $169/167 for .57. Could return nearly 4-1 if the SPY closes below 167 on August 2nd. Nice asymmetric risk/reward set-up. I do not own any VXX calls (I almost never do), but am eyeing call spreads. I firmly believe that selling call spreads and buying puts when the VIX is high is the easiest way to play the VXX, but occasionally call spreads can present higher probability 2.5-1 risk/reward ratios. One example may be the Aug 2nd $15/15.5 for around .20.