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Options Market Outlook
October 14, 2013
Volatility in Equities saw some significant intraday spikes this week.
This still comes within a very healthy overall environment.
Strength is concentrated in small and mid-caps.
Large caps considerably weaker and maybe more vulnerable, despite higher vol in small-caps.
Europe and Asia are strong.
Tactical risk is only slightly elevated in Equities. Stay the course.
We see three clear tactical themes on intermediate timeframes:
In Equities, the bulls are in control.
Treasuries in the process of trend change, but think quarters to years. No short term inflection.
Precious Metals are set up for further weakness.
Elevated tactical risk in Equities can be effectively managed
In practical terms, this means the risk of a decline is still small, but the magnitude of that decline could be very large and volatile.
Proper hedges can help mitigate these risks.
Ideal hedges would be insensitive to vol (low Vega) and protect against a moderate decline, perhaps in the 5% - 10% range.
Elevated implieds and directional uncertainty complicate long vol strategies and bring risks to premium writers.
Long vol positions would likely require a selloff to be profitable, and selloff isstatistically less likely than a rally.
Long vol/directionally short-biased trades could make sense if attractive pricing can befound, or as hedges to existing long exposure
We have been advocating fading downward spikes, which would have been quiteprofitable this past week. Be careful of going back to the well too many times;subsequent declines are more dangerous.
Be careful of covered calls if you do not want to be called away. There is a good possibility of astrong recovery and rally. Premium writers who are indifferent to being called away may findthis to be a very favorable environment.
Waverly Advisors, LLC
228 Cedar StreetCorning, NY 14830(607) 684-5300
Chief Investment Officer Tactical Investments & Research
Chief Executive Officer Macroeconomic Research
firstname.lastname@example.org(607) 684-5300 www.waverlyadvisors.com