The Broader Markets
Last Week – SPY was higher by about 1.6% last week, a move less than the 2.5% options were pricing. It was higher by more than 3% at one point mid-week. Implied volatility contracted on the week.
This Week – SPY options are pricing a nearly 2% move this week (about $9 in either direction).
Implied Volatility / VIX – The VIX closed last week near 23, down from nearly 28 the week before, and down significantly from near 40 on January 24th. January 24th marked the lows of the recent selloff. SPY is higher by about 7% since then, with the VIX down more than 40%. Implied volatility is still slightly above historical averages, indicating some remaining trepidation about the bounce, assumptions of more day-to-day swings, or simply lingering inertia from the large moves of the past few weeks.
Expected Moves for This Week (via Options AI)
- SPY 2% (about $9)
- QQQ 2.6% (about $10)
- IWM 2.8% (about $5.50)
- DIA 1.7% (about $6)
In the News
Macro news is still front and center, with inflation, Fed moves, and Russia/Ukraine headlines causing day to day sentiment shifts. Amidst that backdrop have been some fairly eye-popping moves following earnings. Meta/Facebook and Amazon were two of the largest mega-cap earnings moves in recent memory. As stated a few weeks ago, earnings during a high implied vol environment can have unique characteristics. From Jan 23rd:
Options have a harder time pricing near-term events. Earnings are a great example. If overall market volatility is at or below historical averages, the expected move for an event like earnings is almost entirely pricing that day’s potential move. But in a case where options are pricing potential market moves of over 3% for the week, options need to account for potential market moves in the days leading up to or after the event. A company reporting earnings may see 80% of its potential move reflected in its options premium with the VIX 16, but it may be closer to only 50% with the VIX above 30.
There’s also the potential for outsized moves to the downside on earnings while market sentiment is so poor. This is the “shoot first, ask questions later” phenomenon. Netflix earnings last week are an example.
Another effect of elevated vol is that short gamma in the market can accentuate near term and intraday moves.
Meta’s move was an example like Netflix, with a massive move lower following disappointing news. But on the flipside, Amazon blew out its results and saw a massive move higher. The options market wasn’t even close to correctly pricing either possibility, and there was a lot of short gamma in the options market to help supercharge those moves. SNAP also saw a massive move higher, albeit in a much smaller market cap situation than AMZN.
Links go to the Options AI calendar where you can see the other companies each day and click through to see charts (free to use). Recent earnings moves (actual) start with the most recent:
Pfizer PFE / Expected Move: 5.3% / Recent moves: +4%, +3%, 0%
British Petroleum BP / Expected Move: 4.2% / Recent moves: -5%, +7%, 0%
Peloton PTON / Expected Move: 22% / Recent moves: -35%, -9%, 0%
Chipotle CMG / Expected Move: 5.9% / Recent moves: -3%, +12%, -2%
Disney DIS / Expected Move: 5.6% / Recent moves: -7%, +1%, -3%
Uber UBER / Expected Move: 11.3% / Recent moves: +4%, +3%, -9%
Twitter TWTR / Expected Move: 13.5% / Recent moves: -11%, +3%, -15%
Cloudfare NET / Expected Move: 12.3% / Recent moves: -2%, +2%, +4%
Zillow Z / Expected Move: 12% / Recent moves: -25%, -8%, +6%
Based upon publicly available information derived from option prices at the time of publishing. Intended for informational and educational purposes only and is not any form of recommendation of a particular security, strategy or to open a brokerage account. Options price data and past performance data should not be construed as being indicative of future results and do not guarantee future results or returns. Options involve risk, including exposing investors to potentially significant losses and are therefore not suitable for all investors. Option spreads involve additional risks that should be fully understood prior to investing. Securities trading is offered through Options AI Financial, LLC a registered broker-dealer.