When does the VIX become “earnings volatility”?

VIX can act like earnings volatility

Every so often VIX can act like earnings volatility.  What does that mean?  During the normal earnings cycle for any company, option pricing does strange things.  The first thing is Black-Scholes (BS) was never meant to price earnings “events”.  BS was meant to price log-normally distributed prices on an annualized forward volatility.  If you want more info on that, see our Gold Course. Both of those things don’t happen on earnings since it is a one day event with crazy price swings.  The only difference from any other day is that the event is KNOWN for earnings.  The straddles tend to find a level and stay there.  IV has to increase for that to happen.

Macro Events become “earnings events”

The Trade Wars were in the news for 1.5 years and counting.  They helped precipitate the fall of XIV and the kneecapping of SVXY.  They are the again/off again macro event that does not go away.  The G20 meets at the end of Jun and that is shaping up from the markets point of view as some type of watershed.  I am not seeing how one meeting will solve things but the market seems to think so.  Since that date is known, volatility in the Jul cycle is starting to catch a bid.  Since VIX uses 30 day IV, the bid for the event is holding up vol a bit longer than normal creating a pseudo earnings cycle.

VIX could keep a bid well into Jun as the Jul earnings picks up the G20 meeting

Sell the early Jun and buy the Jul

The trade that comes from this is buying Jul SPX options and selling some Jun SPX options.  This could be done in a variety of ways.  What I don’t think is going to move down very much is the Jul VIX future.  The Jun could drop if we actually get VIX cash drop which given the conditions and the Earnings Event around the G20 that will be hard too.  Old fashioned time spreads could work the best, owning cycles just at G20 and selling stuff prior to that.  2900 seems like a short term barrier. Follow Andrew@optionvol You can hear Andrew on Option Block every week. Follow Mark@optionpit You can hear Mark on Volatility Views every week.  Volatility View Crystal Ball is on Friday’s.