Originally I was going to call the FB skew the Big Dipper but the shape of the curve is the other way. We had a little sell off today as the market finally ran out of helium and started to focus on fundamentals. FB was no different. After being a poster child for IPO busts FB has launched way above the low 40’s and is looking for new heights.
The story the skew is telling, is that the upside is where all the bets are being placed. Note the near linear upside curve going into earnings for the Nov 8 Weekly cycle. The FB Nov 8 Weekly 70 call is .40 bid at a 96 volatility. That is a near 35% pop on earnings.
While many of us are stuck watching the wankers on C-Span get nowhere it is refreshing to know that the world outside of our shores keeps moving along. The US equity market is in a malaise in either direction while the health care rollout and the budget discussions drag on. As a side note, if the medical industry was going in the can why would a company like SYK be buying MAKO for a fat premium? I digress.
Look at the performance of DRYS lately, or any dry bulk shipper for that matter. They all have doubled in the past month.
It is kind of a quiet day as we wind toward the close and my thoughts are wandering to what will happen next. The Fed is pumping again so my question is do we go higher or lower? The stock market is not giving back too much today. The only thing really getting slammed is the front term IV in the indexes, especially at the money.
The 3D chart here is very helpful for that. Note the large wasteland in the middle. That is implied volatility imploding ATM. The more interesting thing is where it is not imploding. Look at the upside call skew. That is still bid just a bit. That is a sign the upside skew is getting closer to the ATM implied volatility.
We are back to the bizarro world of bad news is good news. The housing numbers were not super great, although better than last year, but not enough to really thrill folks. So the market assumed QE is on forever I guess with the T-bill rallying. There still is short term enthusiasm for bonds amid the undeniable trend of rising rates as QE starts to wind down. As a friend of mine in college would say, "Let the funnies have their way."
The market is falling off today mostly as a result of the chatter on the “taper talk”. With economic data improving the reason for the Fed to become a bigger holder of debt is looking less and less like a necessary idea. From a volatility point of view how is the market starting to absorb the fact that the easy money days are soon to be over? The answer to that is the upside in VIX is starting to pick up.
A sleeping Giant has been awoken by Mobile Advertising. FB now appears like it is going to let all of those IPO buyers out of the stock and maybe more. I think selling at 38 though would be a huge mistake, because the stock appears to want to keep moving and IV appears to be heading higher in the near term. For starters IV is rallying with the stock.
The earnings season has been a mixed bag so far. Mark commented about it on CNBC yesterday morning and the fact that IV is not really taking off. VXX is making year lows today and the IV in the SVXY (Pro Shares Short VIX futures ETF) is making a 52 week low today. Even with VIX cash up the VIX futures compressed a bit. The only thing cheaper than the IV is the realized volatility clocking in a at 7.27 for the SPX. The low volatilities seem to set a table for something higher down the road but we will need a catalyst. The earnings season has not provided one and the muted movement is having an effect on the skew in FB.
The last few days are if anything a sign that all good things must come to an end. The market has now gone from the proposition the Fed will stop buying paper to the realization that the Fed is going to stop buying paper.
The market did a big reversal today. Actually I am surprised that the VIX came in as much as it did but my only answer for that is that put holders had to bail once we started to rally. Whatever set the market to making the 1.5% move from the bottom made traders dump their juice. Another place traders have been dumping juice is in TSLA.