This Week in Vol: Bond Vol Jumped

Watch first: put/call parity

The parity video I promised last week is up. Twenty minutes with a former market maker, working through a live chain: why a call and a put at the same strike are the same trade with different labels, and how to spot the carry in the gap between them.

Watch Put Call Parity Explained on YouTube

The full hour of the live show is here if you want the Q&A and the Greeks section too. Leave a comment under either one with what you want covered next.

The vol snapshot

Bond vol jumped and stocks did not notice. The MOVE index closed Friday at 96.0, up 15.4 on the week, after touching 104.6 on Thursday. That is about 6 basis points of implied daily movement in Treasury yields, and it sits higher than 96% of the past year's closes. The ten year finished at 5.18%, up 18 basis points on the week. The thirty year closed at 5.50%.

The VIX closed at 14.87, up 0.06 on the week, with SPY up 1.3%. One month SPY implied vol is 11.5, still the 4th percentile of its year, against 9.8 realized. The SPY curve slopes up cleanly from 7.9 vol for Monday to 10.1 for Wednesday's quarter end, 12.7 for late October and 17.2 a year out.

Last week TLT and SPY carried the same one month vol. This week TLT is at 13.8 and SPY at 11.5. The bond market is paying up for the next move and the stock market is not.

Movers

• TLT. One month IV 13.8, the 97th percentile of its year, up from the 70th a week ago. Realized is 11.3, so the options are running ahead of the moves.
• VLO, MPC and PSX. IV of 53.5, 48.7 and 42.1, all 97th to 98th percentile, a fifth straight week on this list. This time the stocks fell 6 to 7% on the week, and vol stayed put.
• HUM. One month IV 66.7, the 98th percentile, against 25.2 realized. Earnings are not until November 6, yet the front month is priced above the second. Something close in is being paid for.
• NVDA, AVGO and MU. NVDA one month IV is 31.3, right at its one year low. AVGO is in the 1st percentile of its year and MU in the 7th, with MU reporting on Wednesday.

The week ahead

Five names with confirmed timings. Four of them price the report below their own history. Micron is the big one, a trillion dollar chip company priced at two thirds of its usual earnings move.

Micron's last eight reports split into two groups. Three moves under 4% and five over 8%, with nothing in between. The 5.9% the options are pricing sits right in the gap.

Implied move is what options price for the report itself. Realized average is the average absolute move across the last twelve reports, measured close to close, using the next session close for reports after the bell and the same day close for premarket reports.

Last week's six results: four stayed inside the straddle, two did not. AutoZone moved 3.3% (priced 4.1), General Mills 1.0% (3.8), Darden 3.0% (3.5) and BlackBerry 6.0% (8.9). Costco was priced below its history at 2.4% and moved 2.9%. Paychex was the big one. It was priced at 4.8%, above its own history, and fell 8.8% on the day.

One vol concept: reading the Premium column

A ratio under 1 means options price the report below that stock's twelve report average. It does not mean the options are cheap. An average of twelve carries every outlier, and one bad quarter can hold the average up for three years. Paychex shows the other side. It priced above its history and still moved more than twice its usual amount. The ratio tells you where the market sits against the past, not what happens on the day. Before you call a straddle cheap, look at the typical quarter and the worst one, not just the average.

One terminal tip

Open the Earnings Straddle Backtest module on NKE before Thursday. Nike has the lowest ratio in the table at 0.61, and the module lays out all twelve quarters one by one, so you can see whether that 9.2% average is a steady number or a couple of big quarters doing the work. Free 7 day trial.

Five results next week, Micron first. Tell me under the parity video what you want next.

Ryan

Educational content, not investment advice.