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Backwardation

Weekly Market Assessment
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There is a term called backwardation, this term describes a market condition where the front month future contract price is higher than the back month contract price. This expresses to the market that current conditions are seen in the market as extremely short term. What has happened this week in the Volatility Index (VIX) is a pure example of backwardation and a sign that a risk of default was already factored in. The VIX is a gauge of the current volatility and uncertainty in the S&P 500. This week it spiked on default risks to above 20, up over 28%. However, if you review the back month (1, 2 and 3 months in the future), that VIX price was trading between 16-17, which was ~20% below the current month price. This demonstrated to the market that fear of a default was a minor blimp in the overall market sentiment and that this current volatility should be short lived. Today, the VIX has now corrected by ~20% and regressed into the range of back month prices. As I mentioned last week, the market is a discounting mechanism and gave another sign that siding with the market was the right choice over the fear mongering coming from Capital Hill.  We are now entering earning season, which again will give a clear picture of how this market should trade based on the fundamentals and not on political concerns coming out of the Washington cohort. The Dow Jones has bounced off a huge support level at its 200 day moving average while also the S&P 500 found its support at its 100 day average. These support levels along with other intermarket realtionships continue to reveal the strengths and direction of this market which is to push forward. 
 
Through the Looking Glass: My Perspective on Stocks Reactions to Market Conditions
Due to the government shut down, certain economic data reports were not released to the market, I will be waiting to add commentary to this section once the government has reopened.   
 
From the Trading Floor to the Option Pit: A quick look at whats on the trading desk

Priceline (PCLN) - Sold Vertical "CALL" spreads on a huge run up to all time highs at $1074. I sold 1070/1075 Calls for a weekly gain of 27% on my options.
 
Intututive Surgical (ISRG)- designs, manufactures, and markets da Vinci surgical systems, and related instruments and accessories. On a report from a sell side analyst about the business practices at ISRG and how they were in direct violation of FDA marketing rules, I sold a Vertical "CALL" spread at $375/380. This went against me where i had to exit the position with a 18% loss on my options in this play.

8 Comments to Backwardation:

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