Double Q's

I have of late been watching the Q's, an ETF for the NASDAQ 100. They are trading near some low support and did not get a boost from the Fannie/Freddie buyout. However, their Implied Volatility is still relatively low at about 25%. And, there is always a lot of volume.

I have been watching VXN to see if it gives me buy and sell signals for the NASDAQ 100 and QQQQ, before I jump in with long calls or puts.

The other thing to watch is the double Q's QLD. They mimic the price movement of the Q's roughly 200%. Every price swing up or down it's done two fold. Because of those larger price swings, they also have twice the implied volatility at 56%. However, there isn't nearly as much Put/Call volume on the QLD's as the Q's.

This is just on my watch list. I'm watching the volatility smile to see where the money goes, and I am testing this system to see if it is going to work.

(QLD Volatility Smirk, Volatility Spiking at near term ITM Calls)

Volatility Smiles

Volatility smiles take options models (such as Black-Scholes) and solves for implied volatility. Be aware that implied volatility and historical volatility are different. Historical Volatility lags current price by several weeks, but usually is near Implied Volatility, otherwise it creates a skew (but that's another post).

Looking at the graph, it forms a smile. That's because the demand on either side of the price is increasing. People are taking gambles, and driving the prices up. Options will generally have a lower volatility At the Money, whereas calls and puts on either side will be considerably higher, forming the smile shape.

The more extreme the price volatility, the more likely we are to see a large move in the underlying, not always though. Good smiles might be a good case for a long straddle, or other strategies.

(Volatility Smile for CPSL Sept '08, note the near term Smiles and the long term Smirks)

What happens when there is no smile, or rahter just a volatility smirk? The money isn't there yet, but as you watch over time, a skew becomes a smile; you know where the money is heading.