After my post on Friday I was feeling pretty good about the state of implied volatility for the short term. Then I woke up on Monday and the Europeans upset my apple cart. Was it 2012 again? So yesterday everyone needed an excuse to sell and we had a short term pop in the VIX only to be erased by the up move today. From a volatility point of view todays up move was more violent than the down move yesterday. In general when two directions (up or down) are in play the IV tends to hop up. What happens when the market takes one side out of play? That is the YUM (my) trade of the day.
After the bell, no matter where the VIX ends up closing, the news on the closing bell will be how the VIX was up 10% or more today, which is some kind of huge move in the 'fear index'. However, there are some things we have to remember about the VIX. It has distortions. Most notably, it is price sensitive, and weekend decay will throw off the calculation. In truth, vols felt heavy all day, and here is why:
In the age of Twitter, I almost titled this “Volatility in Re-tweet.” Sounds a little like Tweety Bird, but you get the idea. With the NFP numbers out and Consumer Confidence numbers ok, the gravitational pull in equities is still up. I think the volatility pattern in the SPY is telling of how the budget battles are going to shape up. In short, I think the battle is over.
VXGOG is the VIX of Google options. It is an index of the volatility of google options with a constant duration of 30 days. You have seen how we like looking at the VIX and overall volatility. One of the great things about VXGOG is that it gives traders, that don't have LivevolX, a decent view of how Google options are pricing. Today, VXGOG hit a 104 week low, trading barely above 18%.
The big surprise today is that the economy shrank in the 4th quarter of 2012. The market did not really care most of the day, as the SPX traded a near term high of 1509.54. The fact that the government is starting to reduce its influence on the economy is probably for the best. If we get out for just modest declines in GDP, that will bode better in the long term. Take the short term medicine now versus a big slug in 4 years. What I think this does is draw a picture of lower realized market volatility for a while. It might not stay at 4% like it is but it could stay in the low 10’s. That brings me to the Facebook trading.
The market is usually fickle about earnings. It is always a case of what have you done for me lately. AAPL is now no exception. When the future always looked brighter, the name would rally day after day. Now the stock is really in a tail spin. Instead of talking about $500 as a buy point, that number is $50 out of the money. That does not stop the AAPL faithful, and a look at the implied volatility after earnings in this case might be helpful.
Goldman put out a comment prior to earnings season, which was something that I happened to agree with. It basically pointed toward the fact that, while the VIX was overpriced relative to market movement, it didn't mean the component parts IV's were necessarily overpriced. Their main point was that it might not make sense to sell premium in individual names; in fact, they might be a buy. At the same time, SPX IV is probably still a sale. Something that might confirm the low SPX expectations are the overall flat VIX curve and the low JCJ (CBOE Correlation Index). Let's quickly break down the trade
While we could sit and debate by how much the VIX is overpriced, and whether it should be trading below 10 (maybe it should), one thing we can't debate is where forward values are pricing VIX movement. Forward values, represented in the futures, are the smart money's guess as to where volatility is heading. The answer is, at a minimum, nowhere, and could be down. On a day when the VIX managed to eke out a small gain, take a look at what the VIX futures curve did?