Papale’s Market Pep Talk

Ok I’ll admit it.  I still have some Christmas shopping left.  When it comes to shopping for gifts, I tend to work better under pressure.  Since the deadline is pretty much past for online orders if I want them by Christmas, I am faced with going to brick and mortar stores.  With  less than a week left it seems more like a shoppers version of musical chairs.  Everyone is nervously running around in circles until the music stops (on Xmas eve).

Wednesday the markets lifted off to a nearly 3 standard deviation move.  The fed finally did what they have saying they would likely do for the last few months, start the taper.  What really lifted the markets was the dovish comments of Bernanke indicating that even with the taper, they would keep rates low.   Whatever the reason, moves like this can wreak havoc on  non directional trades.  While the move was bigger than the probabilities expected, the behavior in the options markets was not.

First, implied volatility got taken to the woodshed.  The anxiety over the announcement was over and options went on sale to the tune of the VIX dropping by around 15%.  Second with such a large move and a bit of whipsawing in the markets, bid asked spreads widened out a bit in at least the index products.  For those having negative gamma, short vega trades on, the drop in volatility helped ease the loss in the position due to the large move upward.  This may or may not change your adjustment protocols.  Positions may have been marked a little out of line on the close yesterday but things came back into line on Thursday morning.  As always, stick to your knitting and manage accordingly.

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