Tuesday, April 10, 2012

S&P 500 Depository (SPY) - Risk Premium for Earnings Season Is... Down?

SPY is trading $136.04, down 1.6% with IV30™ up 12.9%. The LIVEVOL® Pro Summary is below.


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SPDR S&P 500 ETF Trust (the Trust) is an exchange traded fund. The Trust corresponds to the price and yield performance of the S&P 500 Index. The S&P 500 Index is composed of 500 selected stocks and spans over 24 separate industry groups.

This is a vol note on the overall market -- specifically a phenomenon that has developed in the front two months. Let's start with the Charts Tab (six months), below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

We can see that over the last six months the market has risen quite substantially, but in the last few trading days, has seen a fall off from the recent highs. On the vol side, we can see how the implied has risen with the drop. You can think of the IV30™ as a slightly adjusted (perhaps more meaningful) version of the VIX. But the vol rise isn't the oddity that I found.

Let's turn to the Skew Tab to examine month-to-month and lone-by-line vols.

I have taken a snippet of the skew -- specifically, only +/- 10% from ATM, and only options that are $0.25 bid (or more). What we can see is that the front expiry (yellow) lies on top of the back (green) for OTM puts, but below for OTM calls. Looking directly at the ATM options, we can see an 18% vs 18.36% Apr vs May, or in English, essentially identical vols. Let's now keep in mind that earnings season is right around the corner. In fact, AA kicks it off today AMC. Just like individual stocks, an index will show elevated vol in the front month as earnings approach. Let's turn to the Skew Tab on 1-11-2012 -- one quarter ago (AA earnings were 1-9-2012).

Last quarter, we can see that the second month (green) lied clearly above the front month (yellow) for all strikes. In a sense, that spread represents the risk premium the overall market placed on earnings season. Keep in mind that the SPY (SPX) is simply a reflection of the aggregate -- it's a basket of 500 companies and that goes for price and volatility.

As I see it, for the current quarter, the market has a lower risk premium on earnings than last. Is this data fitting? I dunno. But big names like GOOG, AAPL, IBM, XOM and MSFT have earnings in the same month as they did last quarter (GOOG, IBM and MSFT in the front (Jan and Apr), AAPL and XOM in the back (Feb and May)). Note that I'm referring to option cycles, not calendar months.

I guess the question is, does a lower risk premium relative to earnings make sense comparing this April to this Jan?

I've included the Options Tab, for completeness.

This is trade analysis, not a recommendation.

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