With the VIX up .05 to 12.86 as I write this the market is taking a long overdue breather. For the last two weeks through good news and bad, stocks have rallied pretty hard. For instance AAPL has moved a lot but really has gone nowhere. I think the big winner has been GOOG running from around $800 to just over $900 in a two week span. Let take a look at the volatility in there.
On May 3rd the upside skew in GOOG was pointed down in the May 24 Weekly options. I had the ATM volatility around 20% and the 50 point OTM volatility around 17%. We call this a steeper upside curve as opposed to flat since the OTM options are trading for cheaper price pointing the curve down.
I want to characterize today with movement. AAPL trades from 441 to 422, GOOG trades from 894 to 916 and PCLN from 789 to 808. Stocks are moving again and I alluded to that yesterday that the realized volatility for names is starting to pick up. VIX managed up .04 but really the story is that stocks are moving and the reason is money is coming back into the market. I think this means that things that really were not possible with positions most of last year are possible now. You can buy some options and have a shot at making money. Let’s look at a stock in the basement, ZNGA.
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%.
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
As I was sitting down to write the blog today, I have to be honest there were about 3 different things that I wanted to write about. However, they are either inthe Option Pit Strategy Letter, written for TheStreet.com Option Profits Team, or in the hopper on something I want to trade that I don't feel like giving away yet (If there is a trade idea we like, there is a delay between the blog and when we talk about it internally).
We are constantly correcting our option mentoring students about the state of the volatility. The VIX is NOT cheap. It is expensive, not on a historical level, because from that perspective it’s about normal. But it is on a relative level. Check out the continued spread between 10 Day HV and 30 day IV.
Generally speaking, I think my take on which direction the market has been heading is about as good as anyone else's(and by that, I mean worse than a monkey throwing darts). However, there are times where I feel certain about my market inclination. Right now, that inclination is up, and I will tell you why.
One of the important factors that I follow is the price of the VIX relative to the SPX. When the VIX is in decline, but not at a low, while at the same time the SPX is right at an all time high, my general belief is that the SPX is going to go higher. We are in one of those scenarios right now. Take a look:
Think again! One of the things I am constantly working on with my options mentoring students is the understanding of when to buy and sell volatility. Early in their options education, they often will point toward things like "option vols are cheap' or "the VIX is high." This is a great start; however, it is not the whole banana. One of the real keys of understanding options is not only knowing when option prices are cheap or expensive but, also, when to sell cheap or expensive options.
Google taught my options mentoring students a nice lesson on getting long premium into earnings; it usually pays to play the day before earnings, not the day of. Because the ATM straddle that was purchased on Wednesday was a huge winner, while the ATM straddle purchased yesterday was a loser. Thankfully, most students actually had on the long calendar we looked at during the pit report, so they all came out ahead.
Typically, after earnings, we will see implied volatility come out of a stock's options. This is because what was once unknown is now known. When there is less uncertainty, there is less volatility. And on Google’s move today, we can clearly see that volatility fell:
I promise this will be one of the only Facebook options posts I put up over the next few weeks. However, I wanted to make sure that I pointed out a few interesting tidbits about options on facebook that, maybe, the average retail trader might not have noticed. Stuff everyone should know before reading the rest of this piece: