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Much To Consider But Few Concerns

Much To Consider But Few Concerns

Posted June 6, 2024 at 1:00 pm
Steve Sosnick
Interactive Brokers

There are several potentially market moving events on the immediate horizon.  In theory, investors should be showing some concern ahead of tomorrow’s monthly employment report, Monday’s 10:1 ex-split in Nvidia (NVDA) and Apple’s (AAPL) Worldwide Developers Conference, and Wednesday’s double-whammy of a CPI report coming hours before an FOMC meeting.  Any or all of these have the potential to induce volatility not only to the affected stocks, but to the market as a whole.  But options markets aren’t reflecting that possibility.

We can look at the level of the Cboe Volatility Index (VIX) as a proxy for the demand for volatility protection from institutions.  Although its current 12.75 level is above its recent lows, it is not above them by much.  Furthermore, while VIX is a 30-day lookahead, its counterpart, VIX9D is looking towards the more immediate future – the next 9 days.  It too is reflecting little concern about volatility over that period:

3-Months, VIX9D (red/green daily candles), VIX (blue line)

3-Months, VIX9D (red/green daily candles), VIX (blue line)

Source: Interactive Brokers

When we look at the options on ETFs linked to the S&P 500 (SPX) and Nasdaq 100 (NDX), SPY and QQQ respectively, the IBKR Probability Lab shows that for both, traders are placing higher probabilities for upside moves after tomorrow’s figures rather than downside:

IBKR Probability Lab for SPY Options Expiring June 7th

IBKR Probability Lab for SPY Options Expiring June 7th

Source: Interactive Brokers

IBKR Probability Lab for QQQ Options Expiring June 7th

IBKR Probability Lab for QQQ Options Expiring June 7th

Source: Interactive Brokers

The probabilities imply that tomorrow’s numbers will be benign, at least for equities.  That means that the consensus of a 185,000 increase in Nonfarm Payrolls, an Unemployment Rate of 3.9%, and monthly Average Hourly Earnings growth of 0.3% will be met, or if missed, that the miss will be market friendly.    That said, skews for those options expiring tomorrow do show a steep downside skew:

Multi-Expiry Skew for SPY Options Expiring June 7th (blue), June 12th (magenta), June 14th (pink)

Multi-Expiry Skew for SPY Options Expiring June 7th (blue), June 12th (magenta), June 14th (pink)

Source: Interactive Brokers

Multi-Expiry Skew for QQQ Options Expiring June 7th (blue), June 12th (magenta), June 14th (pink)

Multi-Expiry Skew for QQQ Options Expiring June 7th (blue), June 12th (magenta), June 14th (pink)

Source: Interactive Brokers

I find it notable that the skews for options expiring next week also display some bias to the downside even if the probability distributions do not:

IBKR Probability Lab for SPY Options Expiring June 12th

IBKR Probability Lab for SPY Options Expiring June 12th

Source: Interactive Brokers

IBKR Probability Lab for QQQ Options Expiring June 12th

IBKR Probability Lab for QQQ Options Expiring June 12th

Source: Interactive Brokers

The current market environment seems to share its motto with New York State: Excelsior, or “higher.”

Considering that NVDA is up over 10% this week so far and that AAPL has been higher for each of the past nine sessions, one might think that some concern about Monday’s events could be considered “sell the news” events.  Not really.  Starting with NVDA, we do see that the probability distribution has a slight downward bias, but that could easily be attributed to the fact that the stock ran through those strikes yesterday with no resistance:

IBKR Probability Lab for NVDA Options Expiring June 14th

IBKR Probability Lab for NVDA Options Expiring June 14th

Source: Interactive Brokers

Note also that the skew for options expiring next Friday is generally flattish and upward sloping, indicating that FOMO remains in play:

Multi-Expiry Skew for NVDA Options Expiring June 7th (blue), June 14th (purple)

Multi-Expiry Skew for NVDA Options Expiring June 7th (blue), June 14th (purple)

Source: Interactive Brokers

The probability distribution for AAPL is more centered, but its options skew for next week is even flatter than NVDA’s

IBKR Probability Lab for AAPL Options Expiring June 14th

IBKR Probability Lab for AAPL Options Expiring June 14th

Source: Interactive Brokers

Multi-Expiry Skew for NVDA Options Expiring June 7th (dark blue), June 14th (light blue)

Multi-Expiry Skew for NVDA Options Expiring June 7th (dark blue), June 14th (light blue)

Source: Interactive Brokers

Could it be that the only thing we have to fear is a lack of fear itself?  I wouldn’t blame you if you arrived that that conclusion.

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