Traders, something HAS to give in this market place. As many of you know, realized volatility has been in the toilet. This means that the market has been doing little to nothing for sometime. Today, 30 day Historical volatility is going to close at under 13%! That is unbelieveably low. We can see the slow move in the SPX, and its HV falling off a cliff in the chart below:
Graph from livevol (r) www.livevol.com
Getting to a number in stocks and indexes is important: AAPL at $500 (oh sorry, not yet there, but are there doubts?), the Dow when it first crossed 10,000 (the second and third time not as fun), and the VIX below $20. When the VIX is below 20, the market is entering a lower volatility environment, and fund managers get to rejoice again as they try to beat the S&P 500 up. That is a far cry from the opportunities in the 4th quarter of 2011. The step sister of the VIX is the VXX ETN, which is made up of the front two VIX future months. We watch it pretty closely at Option Pit in Option Pit Live. It is a nice trading product. What I am waiting for is a close and drop below $26. Why you ask?
We get questions at Option Pit on a wide range of topics related to options. After all, that is part of what we are here for. After the giant earnings release in AAPL last week, I thought it fitting to ponder if AAPL will payout some of that largesse they have squirreled away. Maybe before looking at what the actual markets think, let’s examine the rule for dividends.
First- Call values do not like dividends and put values do. A dividend increase will decrease call values and increase put values.
It is somewhat common knowledge that I continue to be a seller of option premiums right now. However, that doesn’t mean that traders should be selling all option premiums. There are a few tech names where the implied volatilities have been crushed to levels that we have not seen in some time. Take AAPL for instance: 30 day option implied volatility is at two year lows:
LiveVol (R) www.livevol.com
Today was a day on Wall Street that was well, strange. There was a nice little rally in the NASDAQ as it teetered near even most of the day and ended with a little move up. For the most part the other indexes were lower including the VIX, as there was little good news to really lift things. I think, at this point, the markets are at the end of cheap credit. Negative interest rates for TIPS anyone? That is not the kind of thing markets want to see. There feels like there is some serious confusion as to what money managers will put money into. Does anyone really want to buy an Italian Bond yielding 3.5 after the bond holders are about to take a haircut for Greece? Governments need to start feeling the heat of higher interes
The 4th quarter of 2011 is now viewed as the quarter of "the big growth momentum earnings wreck syndrome". The big names like AAPL, NFLX and GMCR took it on the chin. So did much of the market as I recall, but I digress. At least for the first two names for this earnings cycle that is not the case in the sunny land of 2012 (no problems fixed and the credit you want). I am going to focus on NFLX for now, because I think the reason for the move is much different than AAPL’s, and there is a more interesting trade in there.
To show you how great of an effect that the Fed, Europe, and congress is having on the market, I thought I would point out something unique that is currently happening: Here is a quick look at volatility in the SPX
Livevol (r) www.livevol.com
There has been a bit of confusion as to what exactly what the reserach Jim Cramer quoted Mark Sebastian on last night meant (watch the Video here). Here is the research that was used along with a slightly more indepth description. It should clear up any confusion. As a follow up, you can catch our live webinar on using options to trade stock earnings on Feb 15th. Register here.
Did you catch our COO Mark Sebastian's mention on Mad Money. View the Video here. As a follow up, on February 15th, we will be presenting a webinar: Using Options To Trade Stock Earnings. Register here.
One thing that can be said of the products related to volatility is that they make new lows more quietly than they make new highs. A new short term low goes by with a whisper. Also, the trend in the products does get to be a near one way train at the ends. Let review a few simple stats as the VXX last broke through $28, albeit in the other direction.
In my short stint as a floor clerk (Ronald Reagan just left the White House), I learned an early lesson in liquidity. One of the partners in the firm I worked for would use low liquidity as a partial definition of a Bear Market. Sitting on a trading floor, clerking for a trader who was watching the paint dry was a visceral experience. Watching every equity bid hit in the move up to Gulf War I (Dow around 2300), I could feel no one wanted to do anything. Usually, in a liquid market, there is action between the bid and offer. Not so for that stretch in 1990. No trader would give a floor broker a break filling paper because of the dread overhang of uncertainty with the Iraq invasion.
