Last week we wrote a post on how AAPL implied volatility was in the toilet. At that point in time, AAPL was at its lowest level since the early 2000's. Well, AAPL did one better late last week as the IV fell to the lowest level I have on record. The March 455 straddle that we pointed out as a nice play in the blog actually FELL over the next few days. We had a combo of continued sinking IV and time passing:
Looking at markets all day long really keeps the mind moving. Just like the weather in Chicago, if you don’t like it, wait a few minutes, and it will change. Market conditions can be pesky things when all is moving in the same direction though. The market trade now is very different from the market trade in the crazy 4th quarter of last year. There was a giant bell someone rang and decided stocks can go up too. Also, since the size of the Greek national debt is just a little above the market cap of AAPL, this problem is finally being put into proper perspective.
Option traders, today we want to get a little more philosophical than we normally. As you know, last week I spent much of the time pointing out that several stocks were hitting multi-year implied volatility lows: GOOG and AAPL to name just a few,. Even names like the banks and XLF are starting to get 'cheap.' This led us to the question: when is the best time to buy option premium?
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:
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 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:
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
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