Volatility Tension

07/23/2014 8:00 am EST

Focus: OPTIONS

There’s not a lot of enthusiasm for the August VIX future, and Andrew Giovinazzi of OptionPit.com predicts what may occur by the end of the week.

With less than four and a half weeks to go in the VIX August cycle, there is not a lot of enthusiasm for the August VIX future. Is it cash too high, or futures too low, or just a combination of them both?  There was an average mark up in VIX due to the weekend but not much more than that.  Stocks sold off but really did not have a lot of gas to keep going down.

chart
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Note the lack of premium in the term structure.  This is usually a sign that volume traders are looking for a move lower in VIX.

There was not conviction anywhere really on Monday.  Good earnings are keeping stocks up and bad geopolitical news keeps pushing stocks down.  That should be enough to lock up the volatility for a while.  If nothing else really happens on the global front IV should start drifting a little lower, probably after (AAPL) and (MSFT) report.  I think volatility will break in the path of least resistance which—for 2014—has been on the downside.  The pace of IV decline, however, will be slow.

The Trade

OTM put time spreads should work in VXX during this earnings week.  The near term IV is a bit elevated and game the trade to look for VIX around 11.5% by the end of the week.  We are avoiding index time spreads.

By Andrew Giovinazzi, Chief Options Strategist, OptionPit.com

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