With the underwhelming ADP report the private sector is just limping along but improving slightly. At some point here now that stocks are near all-time highs the residual of the financial crisis ending can only propel things for so long. I mean that as earnings have climbed back up over the last 4 years stocks have had just fits and starts depending on larger macro issue (US debt rating, Euro, US Fiscal Cliff, Europe, Europe, etc) . 2012 was nice but 2011 was a wash as investors worried about the Euro. Now lower interest rates are powering stocks globally. For some reason that is not enough to jumpstart hiring by companies. My only guess at this point is the continuing government dysfunction is worryin
One topic that consistently confuses people is VIX curve structure. It’s not just the level; it’s the slope that matters. Let’s look at two curves with very similar underlying VIX prices. I the difference might be more clear.
On March 21st, 2013 the VIX closed at 13.99, a mere .30% lower than where the VIX is trading. Also a very similar number of days to expiration across the different contract months relative to where we are trading today. Notice the slope of the curve in the front two contract months:
I know things are goofy when I have a backspread in the VIX for our Strategy Letter going into the NFP and the long side did nada today. With the VIX up around .49 near the end of the session and with the selloff there was zip for follow through in volatility. We mentioned early this week about the degree of “boughtness” (I just invented that word) in the protection products, namely index puts, VIX calls and the slow but steady increase in the TLT. Well the BOJ seemed to change all that. What the market saw as the light at the end of the QE tunnel in 2013 could easily be cast aside. The BOJ hit rates with a circus mallet and all the T Bond shorts ran for the hills. The NFP number just proved how unsteady our recovery
Yesterday, on Bloomberg TV I discussed an iron condor trade on PCLN into earnings. Very rarely to I like playing earnings moves. It can be a mess (see my AMZN trade). But, I thought the IV was cheap and that sometimes IV is cheap for a reason, and that the market was expecting PCLN to move like EXPE which did almost nothing. Watch the Video here:
With the market mostly moving sideways today I thought it would be more interesting to look at the activity in MCP. McGraw-Hill is the parent of Standard and Poor’s and has just been unfriended by the Justice Dept. Four years later someone is getting around to blaming the one of the ratings agencies for their calls on the mortgage securities under their watch. Why the other ones are not in the suit is interesting but MCO’s stock is in the basement too. The market seems to think it is coming. Let’s go with the news we have and interpret the reaction.
As I watch the market today most of the volatility is coming from AAPL. Traders still cannot get past the fact that AAPL has changed into a slightly different stock lately. This is something that I call a change in a stocks “personality”. Specifically is the realized volatility the same as it has always been or has it become something else? AAPL does not normally stay at this level of realized volatility for this long. It is usually a gap and then pretty much mid to low 20’s in realized volatility.
Traders, I have to admit it, I was completely floored by the market reaction today. Last night, as I wrote my vol review for the week, I was almost certain that VIX cash and the VIX futures were going to backwardate, which as many of you know, is a sign of a near term bearish market, and typically, a market that is going to sell off. Then something happened, from out of the ashes of a major market break came a total rebound and an up on the day. At the same time, despite all that, VIX was that flat, and IV got smoked across the board, in both VIX and VVIX.
At the end of the day today, the market sold off pretty big. while some might lament that 'the bear is returning', I look at it a different way. With every move in volatility, a new opportunity presents itself. I do not think the last week has been any different. While, yes the market has given away a whopping 4% (that was typed sarcastically) and the VIX rallied for a record 8 consecutive days (off of a 14 VIX I would add), I think this is a good thing for option traders.
Take a look at where the VIX had been over the last few weeks prior to last week: