So the day after Euro Zone disaster light and stocks found their footing by eking out a modest gain. It was still not enough move much but the stock market has been remarkable resilient in shaking off minor irritations. That brings me or our volatility view of the week.
Note the very flat term structure in the volatility curve for VIX. The August future is a $1 over and Sep $1.65. We have been used to 30 day futures of at least $2 in premium on average for the last several years so what gives?
There we go stock finally had a solid down day. No wait, that was the opening. By the end of the day stocks retraced half of what they lost and the NDX got to just up about midday before giving some back. It has been a while since a European entity or issue has shaken stocks. The last one that comes to mind was the banking crisis in Cyprus that made Bitcoin a household name.
The following shows a vol chart of a high dollar stock, The Stock has been a high flier and has had wicked moves. The IV has been extrememly bid relatively consistently, yet over the last two months the undelrying stock volatility has changed. The stock has no longer been moving around as much and has become somewhat range bound. take a look and see if you can guess what the stock is:
The VIX is trading around 12, which implies that the market is going to move about .75% a day, if it is priced perfectly. In the last two days, the SPX has moved about .66% and over the last 10 and 20 days it has moved less than 7%
Tomorrow option headlines will talk about how the VIX 'popeed' almost 10% to over 11.33% today. This will be a complete miss representation of what happened today. Let us talk about a few important things to notice:
1. We were coming off a long weekend where the market closed for 3 1/2 days, a normal VIX adjustment coming off that long of a break should be about 1-1.2% depending on how much Vega is in SPX options at the time.
That is the question I am asking myself. I show IV now in the 6 handle for OTM calls in the SPY. This is on top of the SP 500 moving into record territory again. We are moving into the realm where the upside is so cheap no one wants to sell it anymore. Fund managers looking for extra yield are going to start selling calls in stocks if they cannot get the dollars they want in indexes.
Don’t forget equity option exchanges close at 1 pm et tomorrow.
At this stage of the game the NFP trade seems over. VIX is closing sub-11 and the SPY managed to eke out another closing high on the solid ADP jobs numbers. The moves we usually get in stocks and volatility after the NFP already happened. Sure there might be a nasty surprise but VIX looks poised to print sub-10 for the first time in a long time.
Records, records everywhere today as the major indexes posted new highs for the year. I don’t know what the headline rally was that got the buyers excited but there are some choices: first day of the quarter, POTUS goes around Congress on immigration, so-so economic numbers, Iraq is still a mess, etc. In short there was no good reason for the rally except that we are in a bull market as global economies shake off the financial crisis. It will probably stay that way for a while.
With more than two weeks to expiration, this is a pretty light spread. When taking into account that the cash VIX is in the 11's and the Future is 12.45 this is incredibly low. Basically, traders think that a cushion of about .95 and a VIX future of less than 12.5 is plenty of spread to handle any upside risk in VIX. Why?
A dead day is a dead day. And today the market is living up to its low volatility number by putting in a .14% drop today. That is hardly enough to register on the VIX-o-meter. Any little blip in activity stands out more on a day like today.
Note the activity in the AVP Aug 13 puts. Paper bought a big block of puts and most likely this was tied to stock. As we move forward earnings are usually on the 1 day of August in AVP. This is pretty early in the earnings cycle to buy a big chunk of juice.