Stocks rallied on Thursday on a dose of good earnings and brisk GDP growth, coming despite the slow down in government spending.?? It is good news that the US economy continues to grow.? As in 2011 and 2012 issues overseas can easily take front and center as they are this morning.? The distribution of option volume in the SPY yesterday was not looking great for our rally. ?Mark rightly pointed out in the blog on Thursday that there was no VIX buy in for the rally. ?On Friday, he looke pretty right.
The 3D volume chart shows volume (spike) and implied volatility change (color) yesterday.? The deep red upside shows that paper overall was selling upside calls essentially fading the rally.? Note along the downside puts where the IV rose through to the end of the day.? I have the SPY FEB 168 put highlighted as the curve jumped up yesterday in the big indexes.? The calls sellers and the put buyers were out, which is why the VIX closed about unchanged.
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For today, look to see if the put sellers come back and pound down the skew taking profits.? Essentially, this 3D picture will flip flop and the downside puts turn red and the upside calls start to turn green. The VIX itself feels fairly priced.? Stocks are gapping up or down around 1% with regularity now, so a 17 VIX sounds right and it could go higher.?
The SPY skew is a great place to watch short term sentiment.? Right now the sentiment is looking bad, as even the good EM currencies sell off. ?As of this writing EM stocks are down .09% tanking. ?US equities are dropping worse than Emerging Market stocks as measured by the EEM today. ?There should be a trade there.
The Trade
With the higher downside skew setting up OTM, broken wing butterflies would be the safest way to play a bounce.? Wait till the put sellers come in to take profits.? If you have no directional bias, a short time spread ATM in the SPY with a mid-term duration should work out ok. ?The EEM drop last spring lasted 30 days so keep that in mind.
I like ratio put spreads in the EEM or EWZ that puts you in around 10% OTM. ?Only for those that want to own.