Does a volatility pop tell a story?
With the VIX up .05 to 12.86 as I write this, the market is taking a long overdue breather. For the last two weeks through good news and bad, stocks have rallied pretty hard. For instance AAPL has moved a lot but really has gone nowhere. I think the big winner has been GOOG running from around $800 to just over $900 in a two week span. Let take a look at the volatility in there.
On May 3rd the upside skew in GOOG was pointed down in the May 24 Weekly options. I had the ATM volatility around 20% and the 50 point OTM volatility around 17%. We call this a steeper upside curve as opposed to flat since the OTM options are trading for cheaper price pointing the curve down.
Now we fast forward to this morning and as you see below in my OptionVision™ landscape, the upside calls are pricing a bit higher than the ATM. It is not a lot but remember, those options last week were 3 volatility points the other way and at $65 per volatility point that is a big swing. Note this morning as GOOG tanked I snapped this picture of the upside skew. The OTM calls got real bid as some investors looked for a bounce (dark green).
By late in the afternoon the IV change went from about 3 points on the upside to only 1.5 points. The difference in the shades of green denote a 10% change versus a 15% change in IV. I think this says the quick bounce buyers hoped for got disappointed and the rally faded out of the IV.
The GOOG IV is no longer a bargain but the upside skew is still pretty expensive given the steep curve it usually trades at. When the cool comes out of the upside, look for the rest of the IV to follow.
Normally I would say 1 x 2 upside call spreads for credits (buy 1 selling 2) but the margin is prohibitive (and risky!) in GOOG. You might try an upside broken wing fly (May 31 cycle) for close to no money and a protective put just in case we get a brush back. These positions have been working well lately. If you own GOOG, out of the money calls have usually not been this expensive and it would make a nice sale against a long stock position.
OptionVision™ – data from ORATS
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