There is no doubt we have had a whippy couple of days. Just when I though the Taper, FOMC and NFP were going to dominate the news along comes the Middle East dictator of the hour accused of using chemical weapons. This is an unfortunate and sad chapter for Syria as the Arab Spring tries to flower in other countries. For now rebels are stuck in a bit of stalemate and according to news accounts the Syrian Government is trying something new to break it. That brings repercussions from the US and possibly the UN. That is where we are and now the market waits.
Since this is a volatility blog we will get out of politics and into the trade. The two things happening today are:
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.
Alcoa has the record today for adding the most market cap to broad market equity prices following just a ho hum earnings report. With a shortage of news and not much happy going on in Europe the only thing to make the market rally was good old AA. Did anyone notice the VIX got to near 14% today? We have to go all the way back to the pre-ending QE days to see a VIX around 14.35. My guess is if it breaks 14 stocks will have shaken the QE blues away. Stocks if anything this year have been a poster child for resiliency. A possible monkey wrench might be the rally in oil.
One of our Pro Clients had a funny quote in the Pro Chat today. He said, "The S&P 500 is up today. You don't see that every day. Oh wait a minute, yes you do." In a nutshell, that is what we have, a market that is finding new ways to rally on news like the better deficit numbers and greater bank lending.
We have spent a lot of time in this blog chronicling the movement in Facebook. I think the stock has been a really good trader except of course for the $38 buyers on the IPO. It feels like nobody wanted the stock at $19 either because all the initial investors were getting out. Some did for sure as was reported today but by and large there is a big group of holders not quite ready to hit the bricks yet. The lockup expiration dates have been the great buying opportunities of the year for this name. I guess the point is that when things are telegraphed this well in advance they are generally not what they seem?
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.
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.