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Stocks Rally On July 19, As Implied Volatility Rises Ahead of Italy and ECB Risk

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7/19/22

STOCKS – NONE

MACRO – SPY, VIX

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Stocks rallied for some mysterious reason on Tuesday. I couldn’t tell you why it rallied; there was no news or new developments. The dollar fell on the word the ECB may raise rates by 50 bps on Wednesday. But the move in the dollar doesn’t seem to equate to the 2.76% rally in the S&P 500.

The expiration of the VIX options is the only thing that stands out to me as a potential catalyst today. We, unfortunately, will not know until tomorrow morning what the outcome will be, but it was a rather strange day.

Implied volatility was all over the map, with the VIX trading lower, and an at the money option of the S&P 500 trading higher. Given the equity market’s strength today, I thought we would see a big move lower in IV across the board, but that wasn’t what happened. IV fell sharply on Friday when the market rallied big. But today, on the August 19, 3930 options, the IV was higher.

On Friday, of course, the market was trading at much lower levels, around 3,860. Even when checking the IV of those 3,860 options for the August 19 expiration, we can see IV fell sharply on Friday, but rose sharply today.

So the move lower in the VIX and implied volatility curve overall had to do with the mechanics of the market moving up, perhaps to keep the VIX pinned around 24.50, while beneath the surface, implied volatility was rising on an individual strike price level. Below you can see the move higher in IV for the 3930 term structure for today vs. Yesterday.

While in this next chart you can see the overall S&P 500 IV is dropping due to the spread between the 3930 strike today and the 3830 strike price from yesterday. The VIX wasn’t dropping because implied volatility in options were dropping, the VIX was down because the at-the-money options were moving higher, and as they moved higher implied volatility level between strike prices declined.

Of course, notice where all the open interest in the VIX starts to pick up, above 25.

It probably explains why the VIX traded in an incredibly tight range around 24.50 yet failed to move lower despite a ramp-up in stock prices. The rise in the S&P 500 helped to contain the VIX below 25 while rising implied volatility beneath the surface kept the index from moving below 24.50.

You will know very earlier tomorrow if I am right on this. If I am, the VIX should start moving higher, and much, if not all, of the gains in the S&P 500 from today will be gone. If I’m wrong, the rally may continue.

Anyway, that’s all I’m going to have for you today.

Good luck tomorrow

Mike

Charts used with the permission of Bloomberg Finance L.P.This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice.Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.