When some Spanish province asks for more money, not even good housing market data cannot push the market higher. The reality of our markets is that the ongoing Euro crisis pushes things around with the help of high-end algo traders reacting to every news headline that pops across the screen.
Electronic trading jams a thumb through the low liquidity the U.S. equity markets have faced since mid- March. Voila, our small sell-off this morning.
MARKET RECAP
At mid-morning Tuesday, the SPX cash is 2.02 to 1412.44, and the VIX is down .26 now after being up near 3% after the open, as the volatility markets widened out to respect the last trickle of mirth coming out of the EU.
The volatility markets in general are not pricing current movement. With 10-day realized volatility in the single digits (just under 7% actually), the current IV makeup is pricing the next moves by the Fed and the ECB. If/ when those turn out to be non events, look out below, as the VIX could easily see the 14 handle again.
CHECK OUT BBY
For a trade outside of the overpriced volatility, there are some interesting potential is in Best Buy (BBY).
Figure 1 below reveals divergence between 30-day implied volatility (red line) and 90-day implied volatility (green line). That is simply the market trying to price the new buy-out in BBY after the CEO has gotten the go ahead for some due diligence.
The market is saying not much will happen in September, but a whole lot could happen down the road. The way around this is to look past the 90 day to something in the far term, say March.
The 1 x 2 call spreads (buying 1 and selling 2) around the 22/25 range for even or better are a decent way to play that the CEO will be ultimately successful in his mid-20s bid for Best Buy.
TARGET
Most takeovers like this will be all cash driving the volatility to 0, which should make a $25 target price very nice.
Figure 1 Source: www.livevolpro.com
