Is Russian Aid a Trojan Horse?

08/14/2014 8:00 am EST

Focus: OPTIONS

With geopolitical events driving volatility again this week, Andrew Giovinazzi of OptionPit.com discusses skew activity and the reason options traders are expecting a bounce.

We all know the story.  Troy is finally sacked by the gift of an enemy-impregnated horse the size of a house.  Browsing through the WSJ online I saw an Orthodox Priest blessing a fleet of aid trucks.  I half thought there might be some Spetsnaz Commandos lying in wait in those bad boys.  With the gimpy stock market on Tuesday, I was not the only one.  I am all for Putin giving aid to the hungry but it is still tough to believe.

I lead off with the geopolitical because that is what’s driving volatility. The government is bringing in record revenue (spending issues anyone?) and most other economic indicators point to raising rates in 2015.  That is sounding like some positive activity as the economy can produce revenue and demand for dollars.  Still, it was the geopolitical issues driving stocks Tuesday and all of the global loose ends that have unraveled in the last few weeks.  What did the volume curve say on Wednesday?

chart
Click to Enlarge

At-the-money volume in the SPY is declining.  Upside volatility is rising slightly and this is normal skew activity if traders think we are going to…bounce!  Yes, the word is bounce.  As listless as things were, the upside was just a bit more expensive Wednesday than it was on Tuesday. That says a little bounce.  Maybe those trucks are full of vodka and caviar after all.

The Trade

The SPY Aug 22 Weekly upside broken wing butterflies can be had for small credits.  They could be worth some decent money by next week.

Disclosure: Index positions.

By Andrew Giovinazzi, Chief Options Strategist, OptionPit.com

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