The Broader Markets
Last Week – SPY was lower by nearly 6% last week. Options got caught flatfooted as they were only pricing about a 1.5% move. Implied volatility was up sharply to end the week.
This Week – SPY options are pricing a nearly 3% move this week (about $13 in either direction).
Implied Volatility / VIX – The VIX ended Friday around 29. Up from 19 the prior week. The last time the VIX was above 30 was in early December following a short sell-off in the market that saw the SPY bounce near $450. Since the pandemic sell-off in early 2020, the VIX has spiked above the 30 level 5-6 times. Each time marked an end to that particular selloff/correction. However, on sustained selloffs (or crashes), implied volatility can go much higher. The early 2020 crash saw the VIX above 60 and it essentially stayed above 30 for 3 months. The actual crash only lasted 1 month, beginning in late February with a market bottom in late March.
In other words, during corrections in bullish trending markets, a quick spike in vol above 30 often marks a near-term bottom. But on extended sell-offs or crashes, vol goes much higher and stays elevated long after the market bottoms and realized (actual) vol collapses. This has an effect in a number of ways.
The first is that 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. In a downdraft like last week, put / call ratios elevate as traders reach for protection. Market makers need to sell stock against the puts they are selling. As the market goes lower and those strikes get closer to the money, those deltas increase and more stock needs to be sold. Additionally, as implied vol increases, the delta of farther out-of-the-money puts increases as well, with even more stock that needs to be sold.
However, it eventually has a reverse effect when a market bottoms. As vol decreases and delta-neutral market makers are suddenly over-hedged vs out-of-the-money puts. And with the stock they sold on the way down, they have effectively turned the now in-the-money put strikes (above) into synthetic short call strikes. That means stock needs to be bought versus that gamma to the upside on as the market moves higher, accentuating that initial bounce. (Market makers don’t think of puts and calls in a traditional sense. Because they are typically delta neutral, every strike above the stock is a synthetic call, and every strike below is a synthetic put, or more precisely, straddles they are either long or short.)
The VIX futures term structure is now in slight backwardation, with front month around 27.5 and May around 26.5. That is a rather flat term structure, meaning those looking to sell high IV aren’t giving up many points of vol by moving farther out in time.
Expected Moves for This Week (via Options AI)
- SPY 3% (about $13)
- QQQ 4% (about $14)
- IWM 4.5% (about $9)
- DIA 2.5% (about $9)
In the News
Bitcoin options are pricing about a 6% move into Friday. Ethereum options are pricing about an 8% move.
Links go to the Options AI Earnings Calendar where you can see the other companies each day and click through to see charts. Recent earnings moves (actual) start with the most recent:
IBM IBM / Expected Move: 6.2% / Recent moves: -10%, +1%, +4%
Microsoft MSFT / Expected Move: 5.4% / Recent moves: +4%, 0%, -3%
American Express AXP / Expected Move: 4.4% / Recent moves: +5%, +1%, -2%
Texas Instruments TXN / Expected Move: 4.9% / Recent moves: -5%, -5%, -4%
Boeing BA / Expected Move: 5.3% / Recent moves: -2%, +4%, -3%
Tesla TSLA / Expected Move: 8.7% / Recent moves: -2%, -5%, -3%
Intel INTC / Expected Move: 6.2% / Recent moves: -12%, -5%, -5%
Apple AAPL / Expected Move: 4.5% / Recent moves: -2%, -1%, 0%
Robinhood HOOD / Expected Move: 14.6% / Recent moves: -10%, -10%
McDonalds MCD / Expected Move: 3.1% / Recent moves: +3%, -2%, +1%
Caterpillar CAT / Expected Move: 4.1% / Recent moves: +4%, -3%, -2%
Chevron CVX / Expected Move: 3.1% / Recent moves: +1%, -1%, -4%
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.