We all know that AAPL has had a rough couple of months. The stock has moved up and down 200.00 in the last 6 months. The company has earnings next week and I wanted to put into perspective how much the fear is priced into options right now. Take a look at this chart of AAPL stock and IV.
The Vol is a lot higher than it was last earnings, despite the fact that AAPL had taken a dive from over 700 to near 600. If we compare straddle prices with about the same time to expiration I think it becomes even more clear.
It's been interesting to watch this fiscal cliff debacle develop. A week ago, I had the market pricing in a 92% chance of a deal getting done. Yesterday morning, the market was pricing at about an 80% chance of a deal getting done. Today, that number remains close to 80, although slightly below that now, near 75%. In fact, we can clearly see in this list of SPX weekly option vols what is driving up the VIX:
I had to blink recently, because I thought FB was just a $20 stock. Nothing makes momentum traders happier than an upgrade of a whole bunch of technology stocks at once. FB, AAPL and YHOO all got the nod today from influential analysts and banks. We have had a small short put spread position in YHOO in our Strategy Letter for a while now, so I agree with the bullishness. One thing about the rally in FB is that it was accompanied by a rise in volatility. That I think is interesting.
Sometimes the holiday period brings a surprise of action. Last year with iteration 5 or 6 of the Euro Crisis ending we caught a huge rally and volatility compression right through Thanksgiving. It feels like we got that early, on Monday really, this year. That leaves us with the gap between the holidays and the news about Congress and the White House hunkering down to earn their pay checks and perks. I am hopeful but students at Option Pit know that hope for a trader is a 4 letter word. It goes on the list with need, wish and want. If you find yourself in a trade and the only thing going through your mind is one of those 4 letter words, you should probably look for the exit or adjust. A lot of risk management is like that.
There is a pattern beginning to shape since the election and for the most part it is not good for equities. The day before the election was a near time high for stocks and the market has not sniffed that again. The European situation is mostly the same so I don’t think it is there. The problem is here and what all market participants fear which is the total inaction of the government to get its house in order. Mind you I don’t think it is a 1250 SPX type problem but more of a slow melt until a resolution and most likely a rally. The morning economic news is a little brighter each day followed by a steady selloff after any politician opens their mouth.
By tomorrow night I am not going to miss all the election ads and political screeds brought forth from the Super PACs and the not so Super PACs. This time 30 hours or so from now some decisions will get made on who rules for the next 4 years. I am guessing the Fiscal Cliff solution will happen by Jan 1st since we cannot keep the $ 1 Trillion of spending going forever unless this country wants to emulate the cradle of democracy, Greece. This brings me to trading the FXE.
The market finally got the selloff it wanted. We had steeper put skews and relatively elevated volatility, so the volatility markets were right. This was one of the first weeks Option Pit did not have a short VIX/VXX play in our Strategy Letter (that might change Monday) over the last 2 months. But if I asked you right now if the SPX was up on the week, what would you say? The SPX is up about 5 handles from last Friday, and the VIX is up near a full point. The market was up and volatility was up for the week, so let’s see how long that will last. One place the volatility was up was Gold.
One of the frequent questions we take in the daily pit report during earnings season is if premium is a sale into the earnings announcement. Usually we take these on a case by case basis, but one of the best ways to evaluate this is by taking the front month options and turning them into a pure play on the event.
As I was sitting down to write the blog today, I have to be honest there were about 3 different things that I wanted to write about. However, they are either inthe Option Pit Strategy Letter, written for TheStreet.com Option Profits Team, or in the hopper on something I want to trade that I don't feel like giving away yet (If there is a trade idea we like, there is a delay between the blog and when we talk about it internally).
For those of you not paying attention today, despite the slow equity markets, there is a market where things are really moving around: Grains. Both SOY and CORN are getting smoked today. Corn is down limit, and Soy is off as well. Yet, what is interesting is that, despite an apparent break out today, option prices on the futures and, subsequently, the ETF's are still pretty low.