For the first time in a long time, there were no market fireworks after the FOMC minutes announcement. The key thing is that the Fed sees less ominous financial conditions as the pain of the 2008 crash starts to recede in everyone’s memory. While there have been many head fakes since May, the possibility of Tapering is looking very real. It is quite possible the new chairwoman will put her stamp on the Fed and start taking away the punchbowl. The ECB meets next week to discuss the lack of inflation, so it is possible that they pick up the mantle of QE once Mr. Bernanke rides off into the sunset. That is a big if, as Super Mario likes to keep his powder dry.
While some eyes were on the FOMC meeting today, the VIX only managed a .40 gain on the day. The market took the FOMC minutes as Tapering could happen sooner rather than later. With that out of the way, the rest of November is looking quiet again. Not so for FB after hours.
Mark had mentioned this week about the double bottom curve in AAPL. That pretty much killed the ATM as there was almost no bid for it after AAPL earnings came out. FB looked a bit different going into the report today. The skew on the upside was very flat, relatively speaking. This is more in line with consistent demand across the curve.
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There was a good reason for yesterday's strange AAPL skew structure from yesterday: traders thought AAPL was going to move less than the straddle price. Take a look at the closing options prices from AAPL yesterday.
The market is kind of poking along in an upward fashion. With most global news ok, there is not a big reason to sell off yet. The gloomy unemployment reports are keeping the hopes of cheap money alive for the short term. On Wednesday afternoon, I was running a normal scan getting ready for our Platinum class at Option Pit where we take a deeper dive into specific trades.
I noted FSLR had one of the higher IV’S over realized for the past 60 days. The name also was one of the top performers in tech when the rest of the NASDAQ had been off to the races.
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The SPX failed to hit an all time high and even weekend into the close. What's more, the VIX is now firmly above 13.00 for the 3rd day in a row. While it did manage to sell off a touch, I am starting to see a tiny trend involving VIX and SPX. Looking at a chart, it appears that since the SPX hit its all time high (granted, that was 2 days ago), IV has been creeping higher, and today, SPX failed to hit a new high.
Originally I was going to call the FB skew the Big Dipper but the shape of the curve is the other way. We had a little sell off today as the market finally ran out of helium and started to focus on fundamentals. FB was no different. After being a poster child for IPO busts FB has launched way above the low 40’s and is looking for new heights.
The story the skew is telling, is that the upside is where all the bets are being placed. Note the near linear upside curve going into earnings for the Nov 8 Weekly cycle. The FB Nov 8 Weekly 70 call is .40 bid at a 96 volatility. That is a near 35% pop on earnings.
We have been commenting for sometime that we think the VIX is pointing towards some sort of market top, and is unlikely to move much lower. Today, we think we saw the proof. On a day the market was up pretty big, the SPX was up double digits. VIX, rallied all day closing near the top of the day. Take a quick look at at what is happening in SPX and SPX IV.
Another day, another slow one in the SPX, yet we continue to see the VIX futures point toward a bottom in IV. Despite a day where the SPX went NO WHERE, VIX futures actually continued to be slightly bid.
What's more, the 'bump' in the curve in February is becoming more and more clear. Traders are bidding up Feb and to pay for it likely overly killed November. I don't think a Feb buy is a bad idea, but I think November vol continues to be a scoop.