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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.
Submitted by msebastian on Fri, 10/18/2013 - 2:15pm
This morning as the SPY was sitting at up 4 or 5, the VIX was getting torched. At one point VIX touched below 12.5 and the futures looked like they could break 14. Then something interesting happened. Take a look at the SPY vs. the VIX once the SPY began to rally.
Notice that even as the SPY was rallying higher, VIX kept going up and up. This is even into a weekend, this almost always points toward some sort of near term top in the market and probably a near term bottom for the VIX. So far this year, this pattern has been especially accurate.
One of the great things about GOOG earnings is that they are typically the Thursday night before a major expiration. The value of this is that they are usually clear examples of how the market is pricing expectations of movement in the name. Basically, since the straddle expires tomorrow the straddle is essentially a pure play on earnings with nothing else in it. It also happens to be land on a standard contract month so the contract is extremely liquid relative to looking at a weekly contract.
Heading into earnings this afternoon, GOOG was pricing the straddle at 33.25 with the stock trading about 889.
The VIX got absolutely crushed today. Yet, at trading near 15% the index is still somewhat elevated given the forward risk of the market between now and thanksgiving, the VIX has a lot more to fall. The futures are also point toward VIX falling as well. Consider this, wiht more than 30 days to expire, the spread between VIX and VX futures is normally about 1.5-2 points. Currently, the spread is about .84.