FB announced earnings tonight. While we saw some decent fire works out of AAPL, we did not see the same thing out of FB. The market was pricing in a move of about 7%. As I write this the stock has barely budged. The short strangle/straddle is goign to pay out extremely tomorrow, Shorts will make about 4-5 hundred dollars a spread. The payout is pretty clear below:
In August of 2013, the day the VIX of VIX settlement also happend to be the day of the a FOMC announcment that many thought might be when they would announce the beginning of the end of QE in the US. The night before the VIX cash settled 14.91. With little to no movement in the SPX. the VIX opened up much higher and settled to almost EVERYONE's surprize at 16.42. A huge pop. Check out the intra-day range the index had.
I am not sure what the confluence of news was that made folks nervous but it seemed to be a combination of retail sales, no ECB QE and the latest weak data out of China. That was enough to drive VIX into the 23 handle briefly and set the VIX future curve backward to Aug. We did get a close of Jan VIX close Aug however. The vol traders could not hold the Jan too backward overnight. They could not push it lower however so a little more movement is still expected.
There are many people smarter than us calling for a new vol regime. While we are not 100% sold that is the case, we can say with certainty that a VIX with an 11 handle is going to be very difficult to get to in the next few months. Why? Realized volatility. The market is moving again, something it did not do for months on end. Take a look at 10, 20 and 30 day HV relative to SPX implied vol.
2015 is starting off as the year of many swings. For all the big daily moves in 2015, equities have not really gotten anywhere. The post-FOMC rallies are fueled by the notion of lower rates and we run. Then the sad realization of why we need lower rates hits and we sell off. The only think I can say for this year is that the swings are solid and VIX is off the basement floor.
If VIX is the 'fear index' (it isn't) then today was actually quite worry free. While the SPX gave away almost 2%, the VIX barely moved rallying only a touch over 2 points and settling below 20. Recall that coming off a weekend the VIX SHOULD be higher by .75-1% anway. What does this spell? Take a look at the chart, when I am watching VIX and SPX I always look for divergence... times where the SPX is low and the VIX is low too.
In Tuesday's webinar Options for Stock Traders I discussed how I can use VIX to spot intraday trends. One of the strongest signals for a reversal is when the market is hitting new lows, but the VIX is failing to hit new highs and/or is actually declining in price. We saw a clear example of that this morning. The chart below shows a tick chart of SPX and VIX on the day.
I have been saying for a few days that the coorelation between Oil and SPX is kind of dumb and non sensical. Close observation of the coorelation shows that often SPX sells off with Oil, but once Oil stops selling off SPX would rally.
Now take a look at what happened today. The SPX rallied with Oil mid-morning with a high in the SPX over 18 handles. Then, as WTI and USO sat, the SPX dove on Russia fears and maybe the Fed.