Jan

26

Strong Earning and Fed Sink Volatility

Filed Under Market Snapshots, Option Trading Articles 

Market volatility seems to have grinded to a slow halt as investor confidence in the US equity markets grinds higher.  Implied Volatility measured by the VIX volatility index edged through the 20% level late in the prior week.  Stocks were on hold for the first couple of trading sessions as investors awaited some big cap stock earnings and the announcement from the FOMC meeting on Wednesday.

Earnings results have surprised to the upside, and have allowed US equities to push through resistance levels, that will likely target much higher levels.  Better than expected earnings from Microsoft, Caterpillar,  and Apple, have created a strong demand for stocks, pushing the major averages up more than 6% for 2012.

After reporting much better than expected earnings after the bell on Tuesday, Apple surged more than 7%, and experience a huge decline in IV.  Near term implied volatility dropped from above 35% to below 20% post earnings.  The decline puts at the money implied volatility on Apple at the lowest levels in the past 52 weeks.  Historical volatility has also seen a large drop, with the range method showing a high on historical volatility of 25% and a low near 13%.

Microsoft implied volatility has also seen a large decline.  The software giant has seen large institutional buying which has pushed the stock above the $29 dollars and has tested the $30 dollar level for the first time since early 2010.  Implied volatility on the stock has moved below 20%, which is the lowest level in the past 2-years.

The VIX volatility index which tracks the at the money implied volatilities of the S&P 500 tested the 17.5% level, which is the lowest level since July of 2011.  The lows, since prior to the summer swoon when investors experienced a second panic over the European debt crisis, where 15%, which seems to be the level traders will potentially test.  With the 50-day moving average of the VIX now crossing below the 200-day moving average of the VIX, downward momentum on the implied volatility index is likely.

The Nasdaq 100 volatility index is trailing the VIX, printing a number of 19%, which is above support levels seen in July of 2011.  The OVX has also seen the 50-day moving average cross below the 200-day moving average which is a sign of continued negative momentum for implied volatility.

Investors are still continuing to use the low volatility environment to hedge long portfolio positions.  The skew index, is now at the upper end of the recent range, showing that out of the money puts are still in favor.  Investors are still willing to pay a premium to purchase out of the money puts relative to at the money options and out of the money calls.  Investors could consider using put spreads to hedge long positions.  In this circumstance, and investors could purchase an at the money put and use the skew of the out of the money put to finance closer to the money puts.

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