As we head into another major AAPL event, likely the release of the I-Phone 5s and possibly a low and high end phone I thought I would take a look at what AAPL implied volatility is doing into the event. On one hand, IV has rallied into this event. On the other hand take a look at what IV used to do into earnings and major AAPL events.
The relatively predictable drop in VIX after the NFP today did not catch too many people by surprise. The real surprise was that it started to happen yesterday.
Note the change in implied volatility on the close Thursday. Pretty much all down the curve IV drifted lower. For the last several NFP reports that have been “taper sensitive” IV continued to stay bid well into the announcement. Not so this time and the market might finally be seeing the writing on the wall going forward.
The market is allegedly 'terrified' of Syria, much of the commentary coming out of talking heads, is that this NFP could be the most important NFP in years. Yet, IV's are getting crushed over the last two days.
Yesterday, we spoke about how the VIX cash and futures had backwardated not because of fear, but because of a selloff in the VIX futures. We commented how it seemed; the VX futures thought that the VIX was too high. Today, that relationship seems to have normalized. Take a look at the VX-VIX spread
While today has turned from extremely positive to a bit of a wash day, I think there is one important take away from today. On Friday, VIX futures were terrified of something happening in Syria over the long weekend. Now, three days later, VIX futures are not buying into VIX movement like they were on Friday. Below is a 5 minute chart of the spread between VIX and VX Sep futures.
There is nothing like a day to throw a monkey wrench into the works. Just as sure as we were (at least me) that somehting was going to happen with Syria it now looks as though something might happen with respect to Syria. The difference between will happen and maybe happen has a big influence on how the market prices volatility. What it means is that in the short term nothing really moves while the market prices for the fact that it might.
Right now with 20 Day HV trading around 10.88% the market is just not really moving. Tuesday was a big selloff but even with Fed minutes last week stocks just don't have much push one way or another. Today the market notched .65% up intraday. Still a small change move but not a 17% VIX.
There is no doubt we have had a whippy couple of days. Just when I though the Taper, FOMC and NFP were going to dominate the news along comes the Middle East dictator of the hour accused of using chemical weapons. This is an unfortunate and sad chapter for Syria as the Arab Spring tries to flower in other countries. For now rebels are stuck in a bit of stalemate and according to news accounts the Syrian Government is trying something new to break it. That brings repercussions from the US and possibly the UN. That is where we are and now the market waits.
Since this is a volatility blog we will get out of politics and into the trade. The two things happening today are:
Typicaly, when the market is in actual panic it is somewhat easy to tell because the VIX out performs the SPX. For instance, last spring there was a 'vol run' on VIX where we saw the VIX over compensate on a sell off. We saw something similar in June where the VIX popped somewhat aggresively in the face of a sell off of less than 5%. Sometimes these point toward a major sell off, sometimes they point toward a bottom. Yesterday was a classic example: The SPX was down 7, the VIX was up over 1 point.
Most of the day the market sat around and volatility imploded lower, however, when John Kerry Spoke at the end of the day, the markets listened. Take a look at the movement the VIX pulled out of that speech:
We are back to the bizarro world of bad news is good news. The housing numbers were not super great, although better than last year, but not enough to really thrill folks. So the market assumed QE is on forever I guess with the T-bill rallying. There still is short term enthusiasm for bonds amid the undeniable trend of rising rates as QE starts to wind down. As a friend of mine in college would say, "Let the funnies have their way."