Wednesday, March 16, 2011

What a day what a day!

"Cup check!" A favorite juvenile mantra of mine back in the Little League days echoed in my head today. This was not the sort of day that you forget to wear your cup. This movement is bringing a little bit of life into the options markets I trade so it is exciting, but I am on my toes for sure. In other words, I didn't get nailed today and I was glad to have my cup on. How about tomorrow? What then? Check us out after the break!

Who does this? Morally reprehensible. But pretty funny.

Hope everybody is taking care of themselves out there. Today was a heck of a day, especially considering yesterday's response to the prior night's session.Yikes, to put it simply, we have had a whole lot of movement. As a result of today's close, the S&P 500 will be down on the year. By measurement of the ever popular SPY, and according to the also very popular Google Finance, the market is down about 56 bps, or a little more than half of 1% for you non bps types. On it's own it doesn't scream fear, or worse financial implosion, but there is a palpable sense of confusion in the market. So, our advice? Manage your risk! First and foremost, you must manage your risk. There is no greater imperative.

 What I wanted to cover briefly today is a bit on how, despite a surge in the VIX, we may not have seen the highs in volatility yet. How do I know that you ask? Well, I don't. Disappointed? Me too. But, at the end of the day, fear knows few limits. The chart above is the SPY. How about that? IV30 up at around 26! Wow. Well, our previous major correction could be considered to have begun in April and ended in the middle of June. During the time period, as you can see above, the IV30 of the SPY reached 39. Notice the spike in the spread between the IV30 and the HV30 (that yellow stuff). This type of spike occured the last time we got some follow through in volatility.

A quick look at the XLF. The IV30 vs HV30 spread is 10.1 vs 11.4 in the SPY. Perhaps the SPY overshot, or perhaps there's room for a little pick up in IV30 for financials. Or maybe its more like a drop in realized volatility? Ah, my brain is on fire! Too many possibilities.


 The last look is at XLE, the energy focused ETF. Amazing to consider that in the midst of all this chaos, this puppy is still up over 8% ytd (again, thank you Google). Energy along with the Financials is a major component of the S&P 500. Strength in those spaces could hold us together in the midst of an unpredictable stream of headlines. Time will tell.

The point? While this still might be a minor correction, the potential is there for this to be more like the middle innings and that there may be some more pain to come before my guy Brian Wilson comes in and closes this one out with the ice in his veins! Sorry, got my metaphors mixed up there, but you know what I mean. So wear your cup and Go GIANTS!

* I am short some volatility here. But I know my risk. Know yours!

No position at this time. Position declarations are believed to be accurate at time of writing but may change at any time and without notice.

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