Wednesday, May 26, 2010

The Global Economy and the Market Price of Vol Moving Forward

This keeps me up at night...

In the recent weeks of market volatility, the hyper focus has been on global economies. In the short-term what's going to happen with Europe and the Euro Zone? Is the US immune? Is the "jobless" recovery going to sputter?

The short term focus has revealed a longer term trend in the options market. I'll discuss four companies, a tech bell weather (AAPL), the largest "bricks and mortar" retailer (WMT), the largest online retailer (AMZN) and the largest bank (BAC). The LIVEVOL™ Pro Summaries are below.

The monthly vol term structure for each is included below (click any image to enlarge).

I've highlighted the front month and Jan 2012 vols. Notice for each that the current vol is lower than the back. This is pretty unusual and is symptomatic of the majority of the market.

The Skew Tab snap for WMT with just Jun and Jan '12 is included (click to enlarge).

I've circled the ATM vols. You can see how much higher Jan '12 is relative to Jun.

A week ago we saw a 45 VIX with IV30™ of 167 (i.e the vol of vol). The VIX has come down 33% and the iv in the VIX has dropped 60 points as well.

While the near term end of the world scenario has eased up (for today at least), the back months are not as much. Below you can see the vol changes for this month and Jan 2012 of our four test cases today. These are all negative moves (vol is down today). I have omitted the "-" sign for ease of reading.

We're seeing 12%-16% vol drops today in the front months, but only 3%-5% drops in the back. The option market is implying a volatile future... Not for the next month or two. Not into Fall... This is out to January 2012.

This is trade analysis, not a recommendation.

Legal Stuff:


  1. is there any sectors that the IV has not come down relative with the General market?

  2. I don't actually know of one, but that's not definitive.