MorningWord 2/14/17: Vol-cano?

by Dan February 14, 2017 9:29 am • FREE ACCESS

Yesterday morning I highlighted the implied weekly movement in the etf that tracks the S&P 500 (SPY):

Implied Movement in the SPY, as of a $231.50 close, the SPY Feb 17th weekly straddle (call premium + put premium) went out offered at $1.81, if you bought that and the implied movement for the week you would need less than a 1% move in either direction to break-even, a rally above $233.31, or a decline below $229.69, umm seems kind of reasonable.

On a relatively uneventful day in the markets, the SPY nearly realized that move, closing up $1.26 at $232.77.  I don’t know about you, but this market is feeling like it wants to party, either very near a melt up (see my Fast Money friend Brian Kelly’s take on the topic from yesterday: Are Stocks Heading Towards a Blow-Off Top?) or we are very near some sort of vol shock as spot VIX refuses to become a hat-size (closing up above 11 yesterday as the SPX closed at another all time high).

On Friday, I highlighted the implied weekly movement in Cisco Systems (CSCO) in a week that will see the company report fQ2 results.

The options market is implying about a $1.10 move in either direction between now and next Friday’s close, or about 3.2% in either direction. The stock has moved on average about 4.5% on the day following the last 4 quarters, while its 10 year average one day post earnings move is nearly 6%.

Yesterday the stock realized almost half that move before we even got to the event.

Below is a screen from Bloomberg that tracks 3 month at the money implied volatility (the price of options) for global equities, and just how far below the average they are:

This level of complacency as as valuations are reaching decade highs on a trailing basis:

Oh and if you missed it, Fed Chair Yellen is giving her semi-annual testimony before Congress today and tomorrow. The next FOMC meeting is in a month and Fed Fund futures are pricing only a 30% chance of an increase.  SPY options are pricing a $5.40 or 2.3% move between now and the close on March 17. That seems cheap as chips.

After a sharp move higher following the election, the market largely went sideways for the next few months and that’s contributed mightily to low implied volatility in options. In the past week the market has shown signs of a breakout. Whether that breakout becomes a reality or if it fails, realized volatility in the market certainly looks like it’s about to pick up. And implied volatility and the VIX will as well.