It appears the rally in the financials is not dead after all. While the hyperbolic move is over there is substantial pullback from the near term highs. Most of the financial name pulled back 10% or more over the last week causing a nice pop in the near term IV. The good news is that the near term vol jumps in front of the earnings vol. One of my favorite time spreads is to buy earnings juice and sell near term juice for flat or better vol.
As the SPX tilts to all-time highs again, VIX is meandering down to the 11 handle after getting oversold last week into the holiday. What was strange was the action in the VIX future term structure. VIX futures lifted on a day when there was scant market activity and close to close volatility was even lower than the posted 10 day 4.28%. Every future in the VIX term structure was higher.
Rumors or facts are circulating outside of DC for once. It looks like a midsize hedge fund had to close a short contract position and helped the VIX to a nasty settlement on Wednesday by helping up the IV in SPX. The Total Tuesday Vol Crush gave way to the VIX pop on Wednesday and early Thursday. What it did set up was a strange dynamic in the VIX futures.
So yes you say IV is low but the realized vol is lower. 20 day realized vol is only 6.02% as the SPY and big brother the SPX extend the 80+ day run without a close to close 1% down move. At this point the market is loving the DJT administration, tweets aside. Straight up rallies are hard to diagnose but it appears that the steady mantra ofearnings, less regulation, lower taxes and more infrastructure is having quite a bubbly effect that the buy algos find quite tantalizing.
My general rule trading TWTR is don’t get long without puts. After learning the hard way on the 2015 trip from mid 30 to the low 14s in 2016 the only thing that kept it from being a disaster was rolling my put protection down. The near takeout in Oct/Nov gave me an exit which I took. Now here we sit around 17.09 with Jan IV in the 30 handle. Noone cares for the Dirty Bird anymore.
With VIX grabbing all the headlines for lower volatility at the end of the year it is easier to forget about what help drive volatility at the beginning of the year, namely oil or the proxy USO. Oil IV in the Jan cycle is around 27% which is a level not seen since USO had a 20 handle and is now trading 11.5. It's as if the market decided oil can"t move .50 a day for a barrel. That sounds too cheap given some of the recent movement.