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.
The market did not like any of the numbers today. It like FB and ZNGA but pretty much sold everything else. The two leading groups this year, banks and transports both took it on the chin. While I expect any healthy market to sell off now and again this was a funky sell off. Why? The easy answer is the volatility did not go up that much.
Most of the week saw sideways action in the major indexes. As I write this the S&P 500 is set to close around unchanged. There were too many cross currents in the global front messing with the mostly positive news domestically. With the S&P 500 at multi year highs the news is going to have to get a bit better for us to rally to new levels. A big Yen devaluation and slowing European growth are not going to pave account statements with a new path to riches. Neither macro issue was a surprise which is why the market shrugged it off a bit. The VIX however is going to close the week in the 12 handle which it has not done very often. Usually we have enough of a selloff in stocks to send the VIX back up. Not so this week. The fact t
Something that has been missing for a few years is finally starting to come back into the market. That something is buyers. Option volumes had a rough year in 2012 as most retail investors sat out and watched the politicians and governments pitch fits at each other. The last bull cycle in the 1990s was built on stability coming off of the Savings and Loan Crisis. Remember that? The problems from 2008 and starting to recede from the front of the financial pages but the public is only starting to think beyond it. It would be hard to say stability is back but it does feel better. I want to look at Friday’s rally in AAPL.
While the VIX itself might not be doing much, demand for options has actualy increased in one area, far out of the money puts. The CBOE SKEW Index measures the expense of far out of the money puts relative to nearer the money puts. It has been taking off since the beginning of the month. Take a look at how it has moved over the few weeks.
Our COO Mark was on Bloomberg TV discussing GM options trading. A report from Nikolaj Gammeloft from Bloomberg news discussed how skew levels in GM puts were at the highest levels we had seen in some time. Mark was asked to develop a trade based on GM put skew, and his outlook for GM. You can watch below:
Not the best grammar but I wanted an attention grabber.
Did anyone catch the volatility markup at the end of the day today? We had fairly solid preopening activity this morning, but news of the budget standoff sent the market into a small tailspin. The volatility players are in the serious business of trying to handicap the outcome of the Fiscal Cliff talks. Yesterday players were pricing in a much better shot of things going through earlier than not. VIX traded as low as 15.57, as it sold off most of the day yesterday. After an aggressive print on VIX settlement this morning, volatility traders started buying options in Jan cycle for the big indexes.
Part of the fun of working at Option Pit with Mark is the sessions we have throughout the week with clients ranging from beginners to professionals. Some of our discussion groups talk about some esoteric trading topics, but more often than ot, it is an advanced subject on the trade that is happening now. One of the glaring outliers right now is the flatness of index skew. As a matter of fact, SPX skew is at year lows.
When I was an SPX trader in the early 1990’s, I remember 16% volatility being a screaming sale and around a 9% volatility being a screaming buy. Balancing position Vega between those two extremes was mostly a function of how much skew I wanted to own (or sell) at any particular time. That just brings me to where we are at this point in time. The VIX traded 13.32 today to set a low for 2012. Does it mean anything?