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The Volatility Is Showing The Way - $SPY

by Andrew Giovinazzi 03/15/2013

Well after a record setting week, I am reminded of a period in the early 90's. Not so much the "irrational exuberance" of Mr. Greenspan but more of 1993-1994. We raised taxes and got serious about addressing the budget which is starting to feel like 2013. The hot stocks at the time were biotechs and right now we have 3D printing companies and social media. Old Tech is limping along. Banks and Oil and Gas are doing fine thanks to the closing of the financial crisis and the domestic production boom. And just like 1994, there was little participation by the public because 1987 was still stuck in everyone's head. I am not saying the public will miss the rally but the public is missing the rally now. In short there is plenty of room for stocks if the trajectory of the budget continues to come into focus, namely lower deficits and sustainable spending. How does the market view the records and near records this week? Lower implied volatility is the answer.

If you look at the mid-morning snapshot of IV in the SPY using OptionVision™ note the gentle contango starting to take shape. The near term gamma intensive options are starting to fade in IV and the longer term volatilities are starting to perk up just a bit. Note the downside of the near term Weeklys in the SPY. Those options are finally starting to break down. Much of the weekend decay came out yesterday in option prices, so the IV really looks to be fading here into the weekend.

Stocks tend to like the contango in option volatility. That makes everyone feel normal. At least for the end of this week the market looks like it will head to higher prices at a slower pace. No doubt that will give investors a chance to jump in before it is too late.

OptionVision data provided by ORATS and visuals by Aqumin

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.