This week the broader market is a bit stuck in the mud. Overall the economic news is a bit better and the Europeans are continuing their glacial progress trying to slim down the welfare states of various members. Speaking of welfare states, we have one of our own here due to come to a grinding halt at the start of the year. While high level staffers negotiate some give and take between Congress and the White House I cannot help but think we will get the same level of high wire politics we got during the summer of 2011.
That brings us to volatility.
VIX LEVELS
Market volatility as measured by the VIX is swimming around the 15.33 level this morning. Too many observers that seems low given the huge upset potential in January. The problem is that the VIX is looking at 30 day forward volatility which is hitting around the end of December. The lower volatility months, or new Weeklys, are dragging down the VIX calculation. The term structure holds different events and what is happening between now and Christmas could be, well, uneventful and the volatility market reflects that. January and February volatility can easily heat up and the VIX won’t pick it up for a bit. That could change in a hurry but the index is pretty fair here given current movements in the SPX.
THE PLAY
I would like to own a little gamma. On the possibility that the news out of Washington gets worse we will see a pickup in volatility. Dec VIX ATM call spreads could work since there is almost no premium in the VIX futures right now.
A better trade would be to own some name volatility in the Dec cycle in stocks that have really been moving lately. Facebook (FB) has been my number one candidate for that lately. A long Dec Straddle or just OTM strangle in FB for around 45% volatility should produce a decent return if the name just keeps doing what it has been doing, which is moving.
Disclosure: I have a position in FB.
