Aqumin Volatility Newsletter 12/21/2011 - $COF

What happened to the juice?

I don’t mean OJ. I mean the juice in the options. That is what we used to call the “extrinsic” value in options. Essentially that was the premium in the options above the “intrinsic” (or parity) value of the option itself. There have been sharp declines in implied volatility (we have been showing those) in the markets and I think we finally hit a “spot”. The “spot” is where the market does not really care about Europe anymore because the ECB pulled a Bernanke and flooded the banks with liquidity. Here is how it plays out in AlphaVision™.

First we go to our Landscape of IV30 less HV60. Followers of this column know that has been the go to landscape for inflection points in the turbulent 4^th quarter of 2011. The landscape below is an utter surprise since it is almost entirely red. That means the current IV30 is below the HV60 for nearly every stock in the S&P 500. There is no question now that liquidity providers are forecasting lower implied volatility going forward even with the VIX at lows for the Q4 in 2011. Also note that while implied volatilities are dropping, stocks are going up (taller buildings on the top of the landscape). The pop in stock prices this week has met with a nice drop in implied volatility.

Now for the big surprise which is the volatility crush in the Financials (see below). I am detailing the sector below because that group has been the out and out loser for most of 2011. In the Aqumin Blog of 12/07/2011, I detailed a rising from the ashes of financial insurance stocks. For stocks in the S&P 500 only Financials, Telecoms and Energy don’t have any names with a trailing HV60 trading below the current IV30. The two most volatile sectors have cooled down to the icy point. So where does that leave us?

Well it makes me want to buy financials. And to find what I want to buy I flip over the landscape (below) and only a few names were down for the last week.

Generally when volatility gets so low (no more juice!) the market is taking out one side of movement. COF (Capital One Financial) is down for the week but had a nice move up today (12/21/2011). Maybe the ECB rescue is what the market needed and we start to go higher in the boring world of lower realized volatilities. A little punch of liquidity while the politicians try to get things going, one can hope.

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