Walking Backwards
The FED did not do much for the market yesterday. Judging from the lasting effects of QE3 they did not do a whole bunch the last time either. The market is rightly focused on company prospects, the global growth story and earnings. That is still a mixed bag but not as bad as it looked 4 months ago. The ECB is not really rolling out their TARP- lite plan fast enough for investors (although PIIGS bonds are trading at short term highs and lower yields). The next news from the FED will be QE3 is over and that will only happen when the fiscal situation straightens out. The no FED panacea sell off yesterday was pretty mild when most of the earnings reports yesterday were ok. I am sticking with my closet theory that market volatility will not slow (or we rally a bit) until AAPL reports tomorrow. There is some interesting movement in the SPX term structure around that.
Data from Livevol ® (www.livevolpro.com)
There is a little backwardation in the SPX from the SPX Nov Weekly (23) strike forward. Yesterday was a slight downtick in implied volatility after the near 2 terms (both of those are AAPL sensitive) since there was no 1.5% move yesterday. The Nov Ordinaries look interesting relative to the Nov09 Weeklies when you look at the term structure. That spread holds the election on November 6th. The Idea would be after the election things get back to normal and term structure should fall into contango. A small bet that AAPL earnings will be ok could ride backwardation giving an extra kick.
The Trade
Buy a just OTM call time spread in the SPX owning the Nov 17 expiration and selling the Nov 9 Weekly cycle. You should be able to pick up those spreads for $1.50 or so. Wait for the walk from backward to forward.
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