VIX Will Hit New 52 W Highs at This Rate, brief AAPL and IBM Preview
I’m writing this mid-day as I am on vacation this week. However, even at mid-day I am noticing a few trends in volatility that developed last week, persisting. This first is higher highs in SPX volatility:
As I mentioned last week, SPX is hitting much higher implied volatility levels relative to the price it is trading. For instance, the last time the VIX hit 21.75 the S&P 500 was trading 1265, about 35 points lower than it is right now (as I write this the SPX is just above 1299) a difference of about 3%. That is nothing to sneeze at in a major market index.
What makes this so important is that movement in fear is not linear. The fact that the VIX hit about 25 when the SPX was around 1250 does not mean the VIIX will hit 25 around 1285 and 28% around 1250. Instead the VIX may hit 25 around 1275, or 1290, we just don't know. I can tell you this though, when we hit 1250, the VIX will be higher than 25%. I also predict if the market hits 1250, it does not hold this time.
This sets off a scenario where at 1250 the VIX is hitting new 52 week highs, if not then than it will when it breaks 1240. That is when a lot of fund managers will hit the panic button. One thing I will be watching for is volatility in the VIX options themselves:
The levels I am watching for are 100% and 110% for a normalized 30 day IV. 100% is about where VIX options reached during the 'vol panic' last month. 110% is about where they topped out in Japan. As VIX options begin to break 110% I think that will be a sign that the market is bottoming. That won't even be the interesting thing to watch.
Keep an eye on the volatility thud when congress finally gets their act together. For now I am slowly building short IV positions, I think this is one of those scenarios where one should expect NOT to catch the whole IV move. Iron Condors make more sense now than they will when the VIX is at 30.
Earnings
For those interesting in Earnings Plays looking at IBM options, I think the July 175 straddle for fewer than 6 dollars seems like a really nice play. I find it hard to believe that IBM will not move 4% or more between now and Friday.
AAPL report on the 19th after the bell, with this run up AAPL is following a pattern of running up into earnings, and selling off after. If I was long here I would think about dumping. Those playing straddles in AAPL should consider selling them tomorrow. I have a feeling IBM falls right back down to 345 tomorrow after the bell. Those that like the company will be much better off buying options there. In fact I think there may be a real chance to buy straddles in AAPL AFTER the company reports.
Don't forget I will be making a special announcment later today on an update of THIS blog. We are presenting a new version of the A Trader's Guide to Volatility! If you missed the first volatilty course, this is your chance to catch it live. It is also updated to discuss currencies, commodities, more of the VIX etns and Vol Contract Futures. Register here: Volatility Course. Sign up for our L3 services and this course is FREE. Sign up for L2 and I will give you the recording of the OLD volatility class for free (still a great course). Email or call us for more information.
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