Volatility Monitor

64 total posts

Skew – MDY (S&P 400 MidCap ETF)

News Trading Desk Volatility Monitor

Volatility Monitor

posted by CAPIS on 04/27/2015 at 8:07 am
by CAPIS on 04/27/2015

SPX futures are up nearly 5 points to 2116.75 as the Greece v. Eurogroup creditors bailout negotiating decended into name calling on Friday.  All eyes will be on Apple earnings today after the close.  Gold is up nearly a percent while crude is trading flat.  The VIX futures are all lower in a fairly parallel shift of the term structure.  Spot VIX closed 12.29 on Friday. Skew– Elevated skew levels remain entrenched in several indices.  Skew is roughly defined as the degree in volatility points to which downside puts trade in excess of upside calls.  You can see this daily, as a matter of fact, in the Index Collar Tracker below.  The Index Collar Tracker gauges the premium cost for a 5% out-of-the-money put purchase in excess of the 5% out-of-the-money call sale for a three-month term.  It also shows the premium as a percent of the underlying index as well as the exact spread in volatility points.  Often, skew will be represented as a ratio (90% of spot strike/110% of spot strike).  The 90%/110% skew ratio for the S&P MidCap 400 ETF (MDY) is presently over 2, a reading in the top 3% over the past five years (graph below).…

SPX futures are up nearly 5 points to 2116.75 as the Greece v. Eurogroup creditors bailout negotiating decended into name calling on Friday.  All eyes will be on Apple earnings today after the close.  Gold is up nearly a percent while crude is trading flat.  The VIX futures are all lower in a fairly parallel shift of the term structure.  Spot VIX closed 12.29 on Friday. Skew– Elevated skew levels remain entrenched in several indices.  Skew is roughly defined as the degree in volatility points to which downside puts trade in excess of upside calls.  You can see this daily, as a matter of fact, in the Index Collar Tracker below.  The Index Collar Tracker gauges the premium cost for a 5% out-of-the-money put purchase in excess of the 5% out-of-the-money call sale for a three-month term.  It also shows the premium as a percent of the underlying index as well as the exact spread in volatility points.  Often, skew will be represented as a ratio (90% of spot strike/110% of spot strike).  The 90%/110% skew ratio for the S&P MidCap 400 ETF (MDY) is presently over 2, a reading in the top 3% over the past five years (graph below).…

Early Exercise – Puts

News Trading Desk Volatility Monitor

Volatility Monitor

posted by CAPIS on 04/23/2015 at 8:01 am
by CAPIS on 04/23/2015

SPX futures are down 5 points to 2095.25 following European shares lower after a Chinese manufacturing gauge dropped to the lowest in twelve months and the PMI for the euro region unexpectedly slowed.  Initial jobless claims came in slightly higher than expected, 295,000.  Gold and crude are both modestly higher this morning.  The spot VIX finished 12.71 yesterday.  The VIX futures are a mixed bag as the first seven are up slightly and the last two down modestly.  All are under the 20 handle. Early Exercise (Puts)– As a follow up to yesterday’s discussion on call exercises, we discuss when to expect that puts will be exercised.  Just as with the call, a put exercise decision will once again simply be a comparison between costs and benefits.  Put exercises are most easily demonstrated from the market-maker perspective.  If a market-maker is long a deep put, he will hedge his risk by being long stock against it.  Being long stock and long a deep put ties up capital, and has an interest cost (carry) associated with it.  If the market-maker exercises his put, he will no longer have to pay carry on the stock (and put) he once owned.  This is…

SPX futures are down 5 points to 2095.25 following European shares lower after a Chinese manufacturing gauge dropped to the lowest in twelve months and the PMI for the euro region unexpectedly slowed.  Initial jobless claims came in slightly higher than expected, 295,000.  Gold and crude are both modestly higher this morning.  The spot VIX finished 12.71 yesterday.  The VIX futures are a mixed bag as the first seven are up slightly and the last two down modestly.  All are under the 20 handle. Early Exercise (Puts)– As a follow up to yesterday’s discussion on call exercises, we discuss when to expect that puts will be exercised.  Just as with the call, a put exercise decision will once again simply be a comparison between costs and benefits.  Put exercises are most easily demonstrated from the market-maker perspective.  If a market-maker is long a deep put, he will hedge his risk by being long stock against it.  Being long stock and long a deep put ties up capital, and has an interest cost (carry) associated with it.  If the market-maker exercises his put, he will no longer have to pay carry on the stock (and put) he once owned.  This is…

Early Exercise – Calls

News Trading Desk Volatility Monitor

Volatility Monitor

posted by CAPIS on 04/22/2015 at 7:15 am
by CAPIS on 04/22/2015

SPX futures are off nearly 4 points to 2087.25 as Europe is setting the tone with its first decline in three days.  The Stoxx Europe 600 is off .4% while the Nikkei 225 is over 20,000 for the first time since 2000.  Both oil and gold are slightly lower.  The BOE officials have unanimously voted to leave the UK’s main interest rate unchanged.  The spot VIX finished 13.25 yesterday.  The VIX futures are all higher modestly on the negative equity tone. Early Exercise (Calls)–  I’ve heard many portfolio managers voice concern about early assignment after writing call options on a position that he/she has no intention of selling.  In fact, the mere possibility of assignment has even precluded some from writing calls.  To be sure, when options are sold the right to exercise is entirely in the hands of the owner of the option.  However, any rational owner of a call option would never exercise his right to call the stock prior to expiration but for one exception:  a dividend* (and only the day before ex-div). Like most things, we could say that you would only exercise a call when the benefits are greater than the costs.  A dividend is…

SPX futures are off nearly 4 points to 2087.25 as Europe is setting the tone with its first decline in three days.  The Stoxx Europe 600 is off .4% while the Nikkei 225 is over 20,000 for the first time since 2000.  Both oil and gold are slightly lower.  The BOE officials have unanimously voted to leave the UK’s main interest rate unchanged.  The spot VIX finished 13.25 yesterday.  The VIX futures are all higher modestly on the negative equity tone. Early Exercise (Calls)–  I’ve heard many portfolio managers voice concern about early assignment after writing call options on a position that he/she has no intention of selling.  In fact, the mere possibility of assignment has even precluded some from writing calls.  To be sure, when options are sold the right to exercise is entirely in the hands of the owner of the option.  However, any rational owner of a call option would never exercise his right to call the stock prior to expiration but for one exception:  a dividend* (and only the day before ex-div). Like most things, we could say that you would only exercise a call when the benefits are greater than the costs.  A dividend is…

FXI (iShares China) Skew

News Trading Desk Volatility Monitor

Volatility Monitor

posted by CAPIS on 04/17/2015 at 11:15 am
by CAPIS on 04/17/2015

Post Written (4/16/15)* SPX futures are off 8 points to 2091.75 as Jobless Claims came in below 300k for the sixth straight week.  Housing Starts increased less than forecast last month.  Oil is trading off roughly $1, slipping from 2015 highs.  The spot VIX finished 12.84 yesterday.  The VIX futures are all higher before the open on the negative equity tone. The Hang Seng Index and Shanghai Composite Index have been on a tear lately.  In fact, both have moved up by 11% this month alone.  The returns have pushed skew to near its lowest levels of the past decade.  In fact, the skew is negative… meaning the 10% OTM put is actually trading on a cheaper implied volatility than the 10% OTM calls.  Take a look at the graph below for FXI (iShares China Large-Cap ETF).  The white line at the bottom shows a value today of -.692 and a blip low of -1.79 back in late November for the 3-month options.  The present reading is obviously in the top 1% of readings for the last decade.  The mean and median reading are both right around 4.77 vol points (puts > calls).  As Goldman notes, “inverted or negative skew…

Post Written (4/16/15)* SPX futures are off 8 points to 2091.75 as Jobless Claims came in below 300k for the sixth straight week.  Housing Starts increased less than forecast last month.  Oil is trading off roughly $1, slipping from 2015 highs.  The spot VIX finished 12.84 yesterday.  The VIX futures are all higher before the open on the negative equity tone. The Hang Seng Index and Shanghai Composite Index have been on a tear lately.  In fact, both have moved up by 11% this month alone.  The returns have pushed skew to near its lowest levels of the past decade.  In fact, the skew is negative… meaning the 10% OTM put is actually trading on a cheaper implied volatility than the 10% OTM calls.  Take a look at the graph below for FXI (iShares China Large-Cap ETF).  The white line at the bottom shows a value today of -.692 and a blip low of -1.79 back in late November for the 3-month options.  The present reading is obviously in the top 1% of readings for the last decade.  The mean and median reading are both right around 4.77 vol points (puts > calls).  As Goldman notes, “inverted or negative skew…

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