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.
Well the Yen is in the can, the Treasuries are dumping and everything that glitters is a dud today. Stocks though are mostly mixed while the volatility market is about flat to slightly up in the VIX futures. As a continuation of last night’s blog I think our summer will be the Zone of Unintended Consequences. I don’t know in modern history if a currency has been able to debase it’s way to glory (see Zimbabwe, Brazil in the bad old days and of course Weimar Germany). Maybe this time it is different but the by looks of the other Asian markets today they do not like the result. Let’s get back to commodities and specifically coffee.
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:
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:
One of our Pro Clients had a funny quote in the Pro Chat today. He said, "The S&P 500 is up today. You don't see that every day. Oh wait a minute, yes you do." In a nutshell, that is what we have, a market that is finding new ways to rally on news like the better deficit numbers and greater bank lending.
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.
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.
One of the first things we try to convey in the Pit Report each day is what the volatility markets are doing. There is always room to discuss a stock going up or down, but volatility study is one of the places we help our clients the most. A day like today is the perfect example. The reason being, of course, is what the numbers say, and what is really happening can be two different things. For instance, the closing number on the VIX today was 12.58, up about .12 on the day. At first glance, that is the volatility up slightly on a day when the market hit another short term high with the SPX just an open away from 1500. Those seem to be two contradictory things.