Backwards No Es Bueno

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Backwards No Es Bueno

I am thinking back to a different place, say mid March when the VIX was trading 13.66 this year.  Traders could buy calls and watch them go up.  Kind of simple really and the big reason options love a bull market (one of my favorite sayings I made up).  Low implied volatility, high gamma and pretty easy on the direction makes for lots of happy people.  The early rally this year made up for all of 2011 and at least for now looks like a near term high the market will not get back to for a while.  For the VIX in 2011, we are darn near the highs for the year.  And today went a bit backward.



Charts from TOS www.thinkorswim.com

What does Backwardization mean?  Essentially the VIX cash trades for more than the subsequent VIX futures contracts and a sign of extreme short term realized volatility.  Extreme short term realized volatility, at least for me, is a sign of great downside turbulence and worry.  Note my spreadsheet below I use to track the VXX:


Data from TOS (www.thinkorswim.com)

The VIX cash price is trading over the May future.  This has not really happened since the fall.  The rest of the VIX Term Structure is flattening as the VIX cash climbs.  Whatever is going on in Greece, plus possible JPM pressing on closing some positions, the market is pricing movement far more than it would appear to be moving.   The SPX is down yes but not moving in the killer down fashion.  More or a step down that shows a lack of conviction.   That is not good short term for the SPX.  The new highs for the year in the TLT are not helping either.

The Trade
I am doing a little less right now and making sure I have no net short contracts.  Spreads in the major indexes and ETF's, and mostly directional OTM put time spreads could work out ok as a hedge and pick up some theta if the Greece news starts to play out.  With the real possibility of Greek elections coming the up/down seesaw is here to stay.




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