Profunds released a nice infochart that shows volatility in perspective over the last 10 years across different indices. I think this is a nice way to look at data and to make relative value calls regarding implied volatility.
Home Sales: Chart of the Year
If you were optimistic about a housing rebound, think again. Existing home sales plummeted in July at a rate of -27.2% versus a consensus expectation of -13.4%. The biggest piece of the news release from the National Association of Realtors:
“Sales are at the lowest level since the total existing-home sales series launched in 1999, and single family sales – accounting for the bulk of transactions – are at the lowest level since May of 1995.“
Graphically, Calculated Risk put it best:
It’s hard to see how this could be positive for home prices or the overall economy.
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– August 24, 2010
Expensive Skew
Despite a rather large decline in at-the-money implied volatility, skew still remains relatively high on the S&P 500. The spread between 90% three month implied volatility and 110% three month implied volatility is at 10.5%, which is well over the 3 year average of 9.39%:
High skew makes buying “crash protection” very expensive. My suggestion would be to purchase put spreads for downside protection, or purchasing your crash protection on Asian or emerging markets that look much cheaper. I personally like to take advantage of steep skew by buying put ratio spreads. A put ratio spread is when you sell more out of the money puts than the near or at-the-money puts that you purchase. The positions often result in a net credit, so it provides cheap protection for smaller market corrections. On the downside, if the market truly crashes, you find yourself with a losing position. This could be mitigated by buying the put ratio spreads in markets with expensive skew (S&P 500) and purchasing out of the money puts in markets where skew is cheap.
Posted in Derivatives, Markets, Trading Ideas.
– August 23, 2010
Noteworthy News – August 23, 2010
Economy:
Consequences of U.S. debt – The Japan Times
Jobless millions signal death of the American dream for many – Guardian
Record jump in food prices keeps inflation high – Guardian
Markets:
Mortgage rates again fall to record lows – Washington Post
George Soros slashes exposure to US equities – Telegraph
Bond Funds Attracting Cash Like Stocks During Dot-Com Boom: Credit Markets – Bloomberg
Mortgage Market Knocked By ‘Mega-Refi’ Talk – Wall Street Journal
Analyst predicts another US market crash next month – Economic Times
Politics:
WikiLeaks founder warned of a smear campaign – Reuters
Frank: Fannie And Freddie Must Go – Investors Business Daily
Joseph Gagnon on monetary policy – Economist
SEC Sues New Jersey as States’ Finances Stir Fears – Wall Street Journal
Posted in Economics, Markets, Media, Politics.
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– August 22, 2010
