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.
I am not one to be into technical analysis. However, to say that they completely don't matter is probably a stretch. For instance, up until today, the 100 Day Moving Average was acting like a trampoline. Everytime the S&P touched the level it would bounce. If you think traders weren't watching the level, take a look at how the VIX would move when the SPX crossed 1913 (the 100 Day)
Thankfully you are not a Russian IRA holder right now. Normally when the USA invades stocks are in a state of suspended animation and then they pop. Historically that is what happens. If the Russians invade Ukraine I am not so sure the same thing will happen. The RSX will probably sell off another 2 or 3% easy. Stocks here will sit in limbo to slightly lower. We have recent history of the RSX and SPY to confirm that.
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While I do agree that there is little predictive value in the VIX on its own, two things that I do think have some predictive qualtites are the relative performance of VIX relative to the SPX and VIX term structure. The one I want to concentrate on today is term structure.
I won’t call today a turnaround day but it was noteworthy for the selloff that wasn’t. The 2 min ceasefire in the Gaza strip did not help. The sideways motion in the Ukraine did not help. The ok jobs report did get stocks back to even at one point but there is still some sadness in the air.
That sadness has helped propel volatility to 3 month highs in many areas. The VXEEM is making a near term high this week even when there has not been a whole lot of movement in the EEM with the 20 day realized volatility just hitting the high 13s.
I do not think today is the beggining of the end. That said, I think there is a good chance that there is at least a little follow through tomorrow (unless there is some sort of crazy surprize in non-farms). Even so, unless the market is down another 1%+ tomorrow, there is a chance the VIX might actually fall or remain relatively flat tomorrow. At the same time, I expect that VIX futures and the VIX ETN's might all be green tomorrow. Take a look at the VIX vs the CURVE at the close (there was a big TAS trade that ran VIX AUG up after the bell).
Ahead of the big premier of Sharknado 2 tonight, I thought it would be fun to look at a potential trade on Comcast, which owns NBC, which owns SYFY, which is showing Sharknado. Do not be surprized if this showing ends up being the biggest broadcast in SYFY history. While SYFY is not a large part of Comcast, whether it actually has an effect on long term earnings or not doesn't matter. I think the ratings on the broadcast will be so high that tomorrow CMCSA might get a small bounce. Regardless, the term structure is such that I think a sale of bullish front week calls might make some sense.
The EU and USA are starting to hit Russia with some bigger sanctions now as the international community is pressing the Russian leadership to end the turmoil in the Ukraine. Both bonds and VIX are rallying but the volatility futures are not really reacting too much near the end of the day. While I think this is bad for Russia short term it is much better that this is finally happening now.