VOL MAN: The Great 8 come under fire as VIX makes a 3 month high

BY ANDREW GIOVINAZZI

July 21, 2024

Hey OP Crew,

If some of my Option Volatility Jargon is vexing, our Glossary is here.

AG’s alter-ego Vol Man here with my weekly analysis. As usual, I will start with my last forecast…

Last Week:

“Big Tech earnings are coming in late July early August however a tone will be set on July 18 with TSM coming out. Most of the big chip makers use TSM in some way. Semiconductor growth is essentially unlimited at this time and that is what the market is feasting on. I expect us to retake highs in QQQ and new highs in SPX on the back of a strong report out of TSM. VIX is again likely to stay in the 12-13 range.”

Well no. This looked great until Wednesday when ASML Holding NV (Ticker: ASML) and Taiwan Semiconductor Mtg (Ticker: TSM) came out. Then the prediction did not look so good. The earnings were good but we needed, as Mark predicted, “perfect”. They were not perfect so the Great Eight slumped 5 to 10% depending on the name. The Invesco QQQ Trust (Ticker: QQQ) was down 5% from the highs. A clean $500 to $475 in a week.

We are going to be at the conference all week, so no normal classes, but will be trading live. I expect a lot of the market performance to hinge on earnings but from what I saw already it will be tough for any of the Great 8 to deliver perfect earnings.

Add to that the on again, off again, JBiden saga and toss in a Crowdstrike Inc (Ticker: CRWD) software upgrade malfunction and market sentiment went from 5660 to 5500 in a hurry. Stocks might have gotten giddy on the election outcome and that was pushed back somewhat. There was some speculation over JBiden dropping out this weekend and as of this writing he is staying in. That is 3 mini vol events and that usually is enough to take the market down 5% or so. We got that in QQQ but not the SPX.

SPX daily price action over the last 30 days

SPX closed near an all time high Tuesday but backed off. The Great 8 stocks were most of the reason for the pullback and the Russell 2000 did give back some of the parabolic gains of the prior week. 6 months of straight up and something has to give in the SPX so the 3 mini vol events was a reason to sell.

SPX sigma (Vol per term average) levels over the last 30 days.

Sigma Vols went from 30 day lows to 30 day highs is a New York Minute. The average implied volatilities just got to the 13 handle which is a lift for sure but no where near a panic level. Mostly the market is widening out the straddle to accommodate the recent 150 point down move in the SPX.

SPX realized volatility snap on Jul 19 2024

Realized vol for 10 days is up to 12.5%. While that is double from the nothing realized volatility we have had it is still pretty low and SPX could not generate that magical 2% down day. Mostly controlled drop of around 1% per day.

VIX Volatility Curves

The real action is happening in the VIX curve as the short term futures dove under the cash VIX. That is generally a signal for a more volatile VIX and choppy SPX. Think up 1% for SPX then the rally goes away. VIX drops 1% then pops again.

Closing VIX curve, Jul 19 2024

Closing VIX cash and curve, Jul 12, 2024

The VIX curve is backward in front and somewhat flat in Sep but the overshap is still in contango so the market is only in the early stages of instability. JBiden staying in the race or some decent earnings this week will take VIX down a bit.

Basic Vol 101 on our Option Pit YouTube channel.

OP VIX Zone Watch

VIX ZONE 1 9-13 We are here

VIX ZONE 2 13.01 TO 17.99 We were here

VIX ZONE 3 18-23.99

VIX ZONE 4 24<

VIX was up all week from last Friday lows. The market was slightly on edge from earnings and that is exactly what happened. I did get some decent put spread closes in Weekly Profit Cycles.

VIX 30 day chart with 1 min candles

I expect VIX to back off somewhat on good earnings or more certainty on the election front. Judging from the ASML/TSM, perfect earnings out of the Great 8 are unlikely so QQQ stays soft. That gives us a choppy week so I will close any upside calls on sharp rallies as I don’t expect them to hold. The DNC is Aug19-22 so that is now a possible VIX event on the calendar right on VIX expiration. I expect a range of 14 to 18 this week for VIX.

Weekly Profit Cycles is opening for a quarterly subscription if you want to learn to trade VIX/SPY exclusively. I am 19 wins for last 25 opens in WPC. So getting paid to own SPY puts in an up market is something anyone can learn to do.

Let’s Go

To Your Trading Success,

-AG