BY ANDREW GIOVINAZZI
April 22, 2024
Yo Pit Crazies,
Ok not this week. Traders sold all of the sexy stocks like Nvidia Corp (Ticker: NVDA) and Advanced Micro Devices Inc (Ticker: AMD). Down 20 to 25% from the highs is nothing to sneeze at but it is totally necessary in my view. This is just what traders call sector rotation. What was hot and sexy is not hot and unsexy for now. That selling pushed the broader market down 5% from highs.
It has also pushed implied volatility up to 6 month highs. I think this is one of the better opportunities of the year if one is ready for it. Volatility is moving up as much as tech is crashing.
You see gravity is a tough and consistent thing. Like the gravity that keeps pulling the trees down into my cove below.
It all ends the same so let’s see how it will play out.
SPX IVs are diverging heavily from realized vol
Volman is trying to help below by pointing out that realized vol is dropping much faster than the market it is dropping. Options premiums are crazy relative to that number. Part of this is just every rally intraday got sold last week. Also the raft of negative news was huge, between war, poor earnings and inflation there was not a single positive thing to hit the tape except the human race made it another week.
Stocks could only manage a 10% realized vol in all of that. That is not the stuff of market crashes. Remember realized volatility is the close to close movement in a security. The selloff was steady but it was not large. Not near a panic.
6 month SPX chart with 10 realized in white, 30 day realized in red
Now that could change and the selling could pick up, that is not what sector rotation is. Investors were buying other stocks almost as much as they were dumping high priced tech. 6 month IV is not sustainable unless SPX spills nasty next week. We should see the opportunity to short volatility via VIX puts or Proshares Ultra Short VIX futures ETF (Ticker: UVXY) this week.
If stocks cannot accelerate down on the news we have had, VIX is not going to hold up here. Vol Gravity should bring VIX back to earth.
To Your Trading Success,
-AG
Andrew Giovinazzi
30-Year Trading Pro
See what's hot at option pit
CAPITOL GAINS: SMR Aug16 7 call closed for a 150% gain
DELTA STRIKE: VLY Mar15 8 puts closed for a 88% gain
PFE May17 26 calls closed for a 66% win
OP MENTORING: SPY Mar22/19 510 put calendars and 520 calls for 6.4% gain
OPTION SHOPPER: ERX Mar28 65 calls closed for a 90% gain