What Does Long-Term Volatility Say About Risk?

Andrew Giovinazzi

Yo, Pit Crazies,

If you want to see what the market is thinking about, just ask the implied volatility (IV).

I gave a hint in Friday’s Pit Report when we looked at Apple Inc (Ticker: AAPL) long-term IV. I’ll be updating an IV every week in Pit Report, and I showed a major correction in long term IV.

AAPL 180-day IV on the bottom chart for the last two years.

The big question is if it spreads to other stocks – and what it means if it does.

Volatility Expectation Tell Us What Traders Think

Now, that does not mean that they are right … just what they are willing to sell for.

As an old market maker – and one who lived and thrived through several crashes – I can tell you the price signal is a very strong indicator. The fact AAPL is trading with a lower long-term IV – and with the stock nowhere near highs – is a strong indicator of expected range … and that range of expectation is much less.

As a refresher, range is the distance up or down from the at-the-money price. While AAPL has moved off the recent low, the upside is not near what traders thought it was just six months ago.

Note below the other bellwether, Tesla Inc (Ticker: TSLA), is showing similar lower long-term IVs, except the massive $70 rally is keeping IV elevated a bit from the dead bottom.

TSLA 180-day IV on the bottom chart of a two- year cycle

This back-month drop suggests we could see lower IVs into 2023, especially for VIX. Mark has been buying cheap 16 level puts in VIX this week in the Vol Trade Desk, and SPY Master owns some 21 puts in VIX.

Post-FOMC on Wednesday could get really exciting …

Join me in SPYMaster now.

The Rundown

SPYMaster

Trade 128 closed for a 14% gain and the 12th win in the last 13 trades.I will no longer list SPYM trade pairs in the rundown … that is for SPYMaster members only.

Option Shopper

Licia is back on a hot streak with the ProShares Short SPX Trust (Ticker: SPXU) Jan27 14.5 puts and a 78% gain!

I am including the long term IV chart below for reference as you can see massive markdowns in long-term IV in SPX-related products.