The blog post that really broke out our blog was this one involving Time Decay and the Weekend (we will always have a special place in our hearts for Bill Luby pushing it out). To sum up the post, we explained how market makers 'moved the clock' on their machines to bring implied volatiltiy down with out screwing around with their actually vols they were running. The basic point is that market makers take weekend decay out over a few days at the end of the week which causes VIX to drop on Thursday's and Friday's and to rally on Monday's.
Close but not quite there yet. SPY traded 199.75 today as the 200 level hangs like the Sword of Damocles over the market. Everything is feeling good and long equity positions are kicking butt. In short living the good life like Damocles envisioned. However, the sword is poised to drop if Janet Yellen cuts the horse hair on rates and down the market drops. There is some weird tension on that tenuous horse hair of volatility.
Yesterday I made a comment on how I thought VIX futures were maybe oversold. I was right, but not in the way I thought. Today, despite the VIX threatening 11.5% and the SPX hitting an all time high, the VIX futures curve barely moved:
The reason they didn't move was because the VIX futures were oversold. They were anticipating today's move and were pricing in the cash VIX adjusting to the futures, not the other way around like I thought. Notice how on top of eachother the curve yesterday and the curve today are, then notice the difference in VIX.
Another day another rally in the good old USA as America Inc. keeps delivering the goods. More solid earnings and home start data got us off to another good start today. Market players are waiting on Yellen to report some lower to stabile rate news, which could send stocks even higher. I see that 200 number on the SPY and can’t help but think that is the next round number to cross the line.
Yet another rally on no bad news as stocks love the lack of action overseas. That was kind of a mouthful. There is no doubt that the gravity is pulling stocks up overall. The rally to all-time highs in the face of overseas unrest is just another reason to believe in the rally. Another reason to believe is the lack of a bid in IV. The VIX cannot hold a bid for anything even as a near panic hit volatility of Friday morning. By the end of today it was all forgotten.
Stocks are shaking off just about everything at this point such as Iraq, Iran, Ukraine, Syria and of course that paradise on the Med, the Gaza Strip. Slow growth in Europe, who cares. WMT swamped in health care costs, take it up. Volatility, well just sell the crap out of it. VIX is now deep into the 12 handle and we might sniff 11% tomorrow.
While I believe that the VIX is not going to 20, I think today's move below 13% might be over done. The VIX has not just eased off the last few days, it has borderline crashed. Take a look at how it looks incomparison to the S&P:
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We all know the story. Troy is finally sacked by the gift of an enemy-impregnated horse the size of a house. Browsing through the WSJ online I see an an Orthodox Priest blessing a fleet of aid trucks. I half think there might be some Spetsnaz Commandos lying in wait in those bad boys. With the gimpy stock market today I am not the only one. I am all for Putin giving aid to the hungry but it is still tough to believe.
We all know that as companies mature there can be some permanent changes to the implied volatility of its options. They can go from low to high and back. Think how the IV of Corning (had their been options) would have appeared when they were in the business of making ugly cookware vs high end glass. That being said, when a stock hits a certain level of volatility that the options become disgustingly cheap it usually makes sense to buy some premium. Take a look at NetFlix IV:
I started trading options as a floor trader in 1991 right about the same time as Gulf War 1. The runup to the war was characterized by gloom, volatility and really weak stock prices. I think the Dow was 2300 or so. Not much has changed in the 24 years since then through several other political crises and GW2. The one constant has been after the USA goes in and starts shooting, stocks rally and the VIX cracks. Until today that is, or maybe.