This day kind of reminds me of the anticipation before walking on a trading floor some mornings. Something is going to happen but you just don’t know what. The first instinct is to raise the bid in the options a little bit and do some price discovery. The corporate earnings news and economic data has been pretty good lately so the heeby geebies are not from there.
So that was fun while it lasted, but in truth it did not take volatility very long to realign itself right back to where it was. Take a look at the curve today and take a look at where it was 6 days ago on Wednesday the 16th.
With 4 ½ weeks to go in the VIX Aug cycle, there is not a lot of enthusiasm for the August VIX future. Is it cash too high or futures too low or just a combination of them both? There was an average mark up in VIX due to the weekend but not much more than that. Stocks sold off but really did not have a lot of gas to keep going down.
Step into the Wednesday time machine and not much happened between then and today. Traders have been so lulled into a stupor with the lack of movement that they bid volatility up to 15% yesterday when it looked like there was another crisis brewing. As of today no crisis, as holders of GOOG and other earnings reporters rejoice in the upside surprises.
Today the SPX finally broke its streak of not closing up or down 1%. While that is certainly important to note, it is not the most important thing that happened today. What most important is how flat footed a few trader got caught. While the S&P moved, the VIX exploded. The VIX moved from the low 11's to almost 15% in one day, in what turned out to be an exceptionally short period of time.
More Yellen testimony hurt the RUT and VIX today as both those indexes made some pretty good size drops. With a lot of old tech like MSFT and especially INTC, starting to trade at multiples out of the single digits what is volatility to do. A client wrote me today and asked if CSCO is next? All of a sudden establish companies are doing something not many thought possible a year ago and that is deliver some growth.
Goldman blew the door off earnings today and now is starting to threaten 170 again on move of about 1.5% today. On the heels of this, traders absolutely demolished GS implied volatility today. While GS is not at its all time high, the IV of the options is at its lowest level post 2008 crisis:
After a weekend of non-activity stocks got back to their old ways and launched this morning without so much as a how do you do. This latest Euro issue has been around since December apparently and Euro bank stocks were already trading at lower levels. Either way VIX and the volatility futures are tanking today and the only thing holding up the IV is the balance of earnings.
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.